7 Fair Lending Pitfalls...and 1 Tip
Here are seven issues and one tip on what your institution should be looking at for Fair Lending today.
Fair Lending is no less of a concern today than ever before.
We all saw President Obama's establishment of the Federal Financial Fraud Enforcement Task Force, which is intended to "wage an aggressive, coordinated and proactive effort to .... combat discrimination in the lending and financial markets."
Of course, HUD formally adopted the controversial disparate impact analysis effective March 18, 2013.
And the CFPB's new power makes this all the more serious:
The largest portion of the CFPB's budget is for "Supervision, Enforcement, and Fair Lending." It is 4 times the size of the FTC's consumer protection budget. Where the SEC has 3.2 employees per enforcement action, the CFPB has 22. Thanks in part to its modernized complaint process (consumers submit complaints by mobile phone applications), the CFPB has received 300,000 consumer complaints in the last three years--guaranteeing it will never run out of institutions to terrorize. The complaint pipeline (shared with other regulators) gives regulators the power to go after shops of all sizes--the CFPB has brought actions with penalties as high as $2 billion and as low as $34,000. When the CFPB brings an action in an administrative hearing, the appeal is to the CFPB Director himself (the person who authorized the action in the first place).
That said, the CFPB has authority to enforce just two of the four Federal Fair Lending laws - ECOA and HMDA. The prudential banking regulators continue to enforce the Fair Housing Act and the Community Reinvestment Act.
7 Fair Lending Problem areas
(1)Maternity Leave
No - you cannot consider whether a borrower may possibly go on maternity leave at some point in the future. It is not U.S. policy to allow loans to be given out on the condition the borrower won't bring another life into this world. Yes - you can ask whether a woman currently on maternity leave plans to return to work. But be very careful here. You cannot discriminate against her by not including maternity leave income. You cannot discriminate against her by assuming she will not return to work after maternity leave. You cannot discriminate against her by requiring she have returned to work before closing the loan. For more, here are 5 settlements and 1 lesson on maternity and Fair Lending. Documentation is crucial in this sensitive area (see #4), but Fair Lending does not require you to qualify a borrower at a pre-maternity leave income if she openly plans not to return to work. For borrowers currently on maternity leave, document: (i) intent to return to work, (ii) right to return to work, and (iii) that borrower qualifies for loan taking into account reduced income during leave.
(2)Withdrawals, not just Denials
Denials are the traditional high-risk Fair Lending area ... but regulators are increasingly focused on withdrawals and whether borrowers were discouraged from applying.
(3)Pricing
The real Fair Lending danger today is not with denials or withdrawals, but instead with pricing - what discretion do your LOs have to set pricing? We always looked at discretion/exceptions regarding making the loan ... but what discretion/exceptions exist in pricing the loan? A discrepancy in pricing without clear underwriting explanation is quickly becoming an automatic Fair Lending violation. This has been the primary concern in CFPB exams.
(4)National origin vs. citizenship
Sometimes it just depends how you word it....Problem - "we're denying this loan because you're Italian." Okay - "we're denying this loan because you're not a U.S. citizen and we are concerned you will take the collateral (car) back to Italy"
(5)Age Exceptions
Age is a prohibited basis except...(a) You can "discriminate" against persons under age of majority, and (b) You can offer preferential treatment for those 62 and older.
(6)Phone vs. In-Person Applications
Although not a "prohibited basis," the CFPB's brochure lists as a warning sign that borrowers are treated differently in person than on the phone. (Even though there might be a good financial reason for this!)
(7)Third Party Providers
Lack of control over third parties, such as mortgage brokers or auto dealers has come back to bite some institutions who are ultimately responsible for fair lending.
One Tip on Protecting Yourself from Fair Lending Problems
This won't come as a surprise to most ... but you can get ahead of
Fair Lending problems with more data. Fair Lending is increasingly data driven. Ideally, you'd have more data than the regulator, but at a minimum it would be good to keep up. Also check out the CFPB's HMDA tool. In an August 2013 teleconference, the Fed explained that it expected a statistical analysis of loans on a rolling basis! There are companies with software programs capable of mining your records to identify lending disparities, key focal points, and essentially show you how regulators will see you from a Fair Lending perspective. We've recently partnered with one such company ... call in if you're interested in hearing more (surprisingly affordable).
In other news:
Powerful poem to share with your loved ones
Surprise! A recent university study finds Dodd Frank hurts small banks....
Here's a WSJ article high-lighting the irony of the finding that the CFPB itself would be in violation of Fair Lending laws under the disparate impact analysis
John told me one good thing about the clocks changing is that it gives us more daylight to melt the snow faster. But I'm not that easy, at least not since the other day when he told me the word gullible was written on the ceiling...
"Tomorrow hopes we have learned something from yesterday."
- John Wayne
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