This week the Non-Discrimination Working Group of the Financial Fraud Enforcement Task Force sponsored a webinar highlighting emerging fair lending issues and hot topics that financial institutions should be aware of as regulatory agencies continue to focus their attention on discrimination in the housing and finance markets. Whether you’re in the business of making residential mortgage, commercial, student, auto, or payday loans, or you offer credit cards, it is important to understand the regulators’ areas of interest and to ensure that your compliance program is designed to monitor and address any potential concerns in these areas.
Created by President Obama in November 2009, the Financial Fraud Enforcement Task Force is the largest coalition of law enforcement, investigatory and regulatory agencies ever assembled to confront financial fraud. With over 20 federal agencies, 94 U.S. Attorneys Offices and state and local partners, one of the task force’s five-part mission is to address discrimination in the lending and finance markets. With federal interagency cooperation and state-federal partnerships, the Non-Discrimination Working Group is dedicated to holding banks and non-banks accountable for illegal discriminatory and unfair practices.
The Non-Discrimination Working Group’s “Fair Lending Hot Topics” webinar on October 17, 2012 was a Federal Reserve System initiative in which senior-level officials from the following agencies spoke about key fair and responsible lending issues:
• U.S. Department of Justice
• Federal Deposit Insurance Corporation
• Consumer Financial Protection Bureau
• National Credit Union Administration
• U.S. Department of Housing and Urban Development
• Office of the Comptroller of the Currency
• Federal Reserve Board
The agencies provided insight into the areas each is proactively monitoring, highlighted recent fair lending enforcement efforts and shared helpful tips on successful compliance management practices. These agencies are concerned about practices that may treat differently, or have a disparate impact on, people or neighborhoods based on race, color, religion, national origin, sex, age, marital status, disability or any other basis prohibited by the Fair Housing Act and/or the Equal Credit Opportunity Act (“ECOA”).
The following are the practices that members of the Non-Discrimination Working Group are currently looking at when examining or investigating a financial institution:
• Underwriting (areas of risk include the application process, denials prior to underwriting, underwriting criteria, AUS vs. manual underwriting, and overrides of credit decisions; recent enforcement efforts have challenged, for example, guidelines that provide for minimum loan amounts, require women on maternity leave to return to work before insuring a mortgage, require that disabled applicants document their disability income through requests for medical information, or permit consideration of an FHA-insured loan applicant’s sexual orientation or gender identity in determining eligibility)
• Loan Pricing (recent enforcement actions have challenged policies that permit discretion in loan pricing by loan officers or brokers in setting interest rates, waiving loan fees, granting exceptions to price caps or other controls on discretion, and which result in statistical disparities between borrower groups)
• Steering (recent enforcement actions have involved “steering” of minority borrowers into less favorable subprime loan products, and agencies continue to explore whether applicants with similar credit quality are provided equal access to loan products and lending units)
• Redlining (lack of lending in certain geographic areas, typically majority-minority census tracts; agencies look at the volume and distribution of applications and originations between minority and non-minority areas, and compare results to peer lenders; also consider location of branches, and marketing and outreach between areas)
• Reverse Redlining (targeting borrowers within certain geographic areas with less favorable loan products such as higher-priced loans)
• Marketing (agencies are currently reviewing marketing for discouragement on a prohibited basis and reviews include all forms of advertising, website content, calls made by loan officers and disclosures)
• Servicing/Loss Mitigation (both the Fair Housing Act and ECOA extend to post-closing activity; agencies are looking at a myriad of issues including modification terms and timelines, proper training at every stage of servicing, loss mitigation and foreclosure, policy exceptions and fee waivers, and maintenance and disposition of REO properties across borrowers groups and in minority vs. non-minority areas)
The Consumer Financial Protection Bureau emphasized that an institution’s fair lending compliance management system should have the following components, as appropriate, to be successful:
• Maintain an up-to-date fair lending policy statement
• Ensure compliance department has access and resources necessary to implement compliance program
• Regular training
• Internal monitoring
• Consumer complaint response
• Independent testing and auditing of policies and practices that might result in disparate treatment or disparate impact across product areas
• Third party service provider oversight
• Recordkeeping, including accurately capturing and reporting HMDA data
• Tied-in with product development, business acquisition and marketing practices
The K&L Gates Consumer Financial Services Group has extensive experience providing compliance counseling, developing compliance programs, preparing clients for federal and state examinations, and defending federal and state enforcement actions and class action lawsuits.