Fair Lending with a Twist: Discrimination Against White Males
By: Melanie Brody, Tori K. Shinohara
A Maryland-based community bank recently was the target of an OCC enforcement action alleging that the bank discriminated against white men. Specifically, the OCC alleged that First Community Bank discriminated on the basis of race and sex by imposing a ceiling on loan compensation paid by female and minority borrowers, but not by other borrowers. The Bank settled and agreed to make restitution to the aggrieved borrowers.
For approximately 10 months from 2010 to 2011, the Bank’s mortgage lending policy capped total loan compensation (including YSP and origination fees) at 2.5 percent for female and minority borrowers. In the event that total loan compensation on a particular loan exceeded 2.5 percent, the Bank would provide a credit to the female or minority borrower for the excess amount. The Bank did not provide the same credit to white male borrowers or couples who were co-borrowers.
The OCC alleged that 65 borrowers were harmed by this practice from June 2010 to March 2011 to the tune of approximately $73,000. As part of a Consent Order to resolve these allegations, the OCC is requiring that the Bank make refunds to the allegedly aggrieved borrowers and submit monthly written progress reports to the OCC on actions taken to comply with the terms of the Consent Order.
It is unusual to see a fair lending enforcement action where the government alleges that a lender has discriminated against white males. This is not the first time, however, that a lender has been accused of “favoring” certain minority borrowers on the basis of a prohibited characteristic. For example, in 2009, the Department of Justice alleged that Nara Bank and its network of dealerships charged non-Asian borrowers higher dealer mark-ups than similarly-situated Asian borrowers. The claims were never fully vetted in court, but Nara Bank ended up settling with the Department and agreed to pay up to $410,000 to non-Asian borrowers who may have paid higher overages.
The OCC enforcement action against First Community Bank illustrates the conundrum facing creditors who are trying to minimize the fair lending risk associated with pricing disparities that disfavor minority borrowers. Absent fixing prices and prohibiting any variation, the only way a lender can ensure that there will be no statistical pricing disparities across borrower groups is to “manage the numbers,” i.e., to expressly consider borrower characteristics such as race, ethnicity or gender when pricing loans. However, as the First Community Bank case shows, considering such characteristics is itself a fair lending issue.