QUESTION
We are a large savings bank. I am
the bank’s Chief Compliance Officer. Recently, we received notice of a
regulatory examination for fair lending, which will surely by based on ECOA and
Regulation B. Since you work with clients on examination readiness, I thought
it would be a good idea to contact you. Do you have any idea what types of fair
lending violations the regulators may report?
ANSWER
While I do not have a crystal
ball, I would be glad to share the types of violations that regulators often cite in
their findings. Enforcement actions are never taken lightly by regulators, so if
your financial institution does get cited, it may portend a somewhat pervasive
aspect of the way you do business. Many financial institutions, such as non-bank
mortgage lenders and mortgage brokers, come not only under federal but may also come under state statutory frameworks with respect to examination and enforcement involving violations of fair lending rules.
When an agency determines that a
financial institution has a possible discrimination issue, the agency is
required to refer the issue to the Department of Justice (DOJ). For instance, by my count, in
2017 the Federal Financial Institutions Examination Council (FFIEC) agencies,
including the Consumer Financial Protection Bureau (CFPB), referred a total of
11 Equal Credit Opportunity Act (ECOA) matters involving discrimination in
violation of the ECOA to the DOJ. The Federal Deposit Insurance Corporation
(FDIC) referred four matters to the DOJ involving discrimination in credit
transactions on the prohibited bases of age, marital status, sex, and national
origin. The Federal Reserve referred three matters to the DOJ involving
discrimination in credit transactions on the prohibited basis of marital
status. The National Credit Union Administration (NCUA) referred two matters to
the DOJ involving discrimination in credit transactions on the prohibited bases
of marital status, receipt of public assistance income, and sex. The CFPB
referred two matters to the DOJ involving discrimination in mortgage servicing
on the prohibited basis of the receipt of public assistance income, and
discrimination in credit card account management, installment lending, and
mortgage servicing on the prohibited bases of national origin and race.
Generally, regulators focus on
three primary areas of interest:
- Redlining:whether lenders intentionally discouraged prospective applicants in minority neighborhoods from applying for credit;
- Mortgage and student loan servicing: whether some borrowers who were behind on their mortgage or student loan payments may have been negatively impacted in their ability to work out a new solution with the servicer because of their race, ethnicity, sex, or age; and,
- Small business lending: whether institutions are complying with the congressional mandate to not discriminate on a prohibited basis in small business lending.
Although the list of possible violations would
be extensive, I would note that the following violations happen quite a lot and, to
that extent, may help you to evaluate your legal and regulatory
exposure. I am providing the federal statutes that would likely be cited by regulators.
Here is
a brief list of some potential ECOA and Regulation B violations.
- Prohibited basis in a credit transaction. [12 CFR § 1002.4(a)]
- Improperly inquiring about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction. [12 CFR § 1002.5(b)]
- Improperly requiring the signature of an applicant’s spouse or other person if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested; improperly imposing requirements on an additional party that the creditor is prohibited from imposing on an applicant. [12 CFR § 1002.7(d)(1), (d)(6)]
- Failure to provide notice to the applicant 30 days after receiving a completed application concerning the creditor’s approval of, counteroffer, or adverse action on the application; failure to provide appropriate notice to the applicant 30 days after taking adverse action on an incomplete application; failure to provide sufficient information in an adverse action notification, including the specific reasons for the action taken. [12 CFR § 1002.9(a)(1), (a)(1)(i), (a)(2), (b), (b)(2), (c)(1)(i)]
- Failure to preserve records of actions taken on an application or of incompleteness. [12 CFR § 1002.12(b)(1)]
- Failure to request information on an application regarding an applicant’s ethnicity, race, sex, marital status, and age, or to note, to the extent possible, the ethnicity, race, and sex of an applicant on the basis of visual observation or surname if not provided by the applicant. [12 CFR § 1002.13(a)(1)(i), (b)]
- Failure to routinely provide an applicant with a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling, and/or failure to provide an applicant with a copy of an appraisal report upon an applicant’s written request. [12 CFR § 1002.14(a), (a)(2)]
Jonathan Foxx
Managing Director
Lenders Compliance Group
