QUESTION
We have a fair lending examination that is going to start in mid-January. Our state banking department is doing it. However, our General Counsel has told us that the CFPB is also interested in our case. Everyone is getting anxious. We’ve been working over the holidays to prepare for the examination.
What area of fair lending should we expect the banking department to audit?
ANSWER
First and foremost, as the year 2021 draws to a close, I want to express my thanks to our readership for their interest in our weekly Mortgage FAQs newsletter. The questions you have asked throughout the year show a deep and devoted concern for strong, steadfast compliance initiatives. May the coming year bring you good health, joy, and prosperity!
Many companies get anxious about a forthcoming banking examination. The fair lending examination is no exception, and, like most such audits, preparation is essential. When it comes to banking or CFPB examinations, it is best to be as prepared as possible.
You may be unprepared for a fair lending examination if you are not periodically getting a fair lending review, such as we offer, thereby ensuring that potential fair lending violations are noted. Please contact us for fair lending assistance.
For fair lending examinations, generally, state banking departments are aligned with the CFPB’s assessment criteria in its fair lending supervision program, to wit, among other things, compliance with the Equal Credit Opportunity Act (ECOA)[i] and its implementing regulation, Regulation B,[ii] as well as the Home Mortgage Disclosure Act (HMDA)[iii] and its implementing regulation, Regulation C.[iv]
In preparing for the fair lending examination, I suggest you carefully review the potential for pricing discrimination. Let’s look at this examination subject.
The ECOA prohibits a creditor from discriminating against any applicant with respect to any aspect of a credit transaction based on race or sex. [v]
It is a “known known” that regulators have observed that mortgage lenders have violated ECOA and Regulation B by discriminating against African American and female borrowers in granting pricing exceptions based upon competitive offers from other institutions. Pricing disparities may be found in the failure of a lender’s loan officers to follow the lender’s policies and procedures concerning pricing exceptions for competitive offers, the lender’s lack of oversight and control over their loan officers’ use of such exceptions, and management’s failure to take appropriate corrective action surrounding self-identified risks.
There have been examination findings where lenders maintained policies and procedures permitting their mortgage loan officers to provide pricing exceptions for consumers – including pricing exceptions for competitive offers – but did not specifically address the circumstances where a loan officer could provide pricing exceptions in response to competitive offers. Instead, the lenders relied on managers to promulgate a verbal policy that a consumer must initiate or request a competitor price match exception.
In particular, examiners have identified certain lenders that show statistically significant disparities for the incidence of pricing exceptions for African American and female applications compared to similarly situated non-Hispanic white and male borrowers. It is worth noting that examiners have not identified evidence explaining the disparities observed in the statistical analysis. Rather, examiners identified instances where lenders provided pricing exceptions for a competitive offer to non-Hispanic white and male borrowers with no evidence of customer initiation.
Furthermore, examiners have noted that lenders fail to retain documentation to support pricing exceptions. Our firm has drafted policies, procedures, and forms for maintaining appropriate documentation for all pricing exceptions. You should do so! If you need compliance support, contact us HERE.
During the examination, examiners may determine that a lender’s fair lending monitoring reports and even the business line personnel raise fair lending concerns relating to the lack of documentation to support pricing exception decisions. We know this because, despite such concerns, lenders have been cited for not improving the processes or documenting customer requests to match competitor pricing during the review period. When that happens, the banking department and the CFPB expect the lender to undertake remedial and corrective actions regarding these violations.
Jonathan Foxx, Ph.D., MBAChairman and Managing Director
Lenders Compliance Group
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[i] 15 U.S.C. §§ 1691-1691f[ii] 12 C.F.R. pt. 1002
[iii] 12 U.S.C. §§ 2801-2810
[iv] 12 C.F.R. pt. 1003
[v] 15 U.S.C. § 1691(a)(1). The ECOA also prohibits a creditor from discriminating against any applicant, with respect to any aspect of a credit transaction, on the basis of color, religion, national origin, marital status, or age (provided the applicant has the capacity to contract), because all or part of the applicant’s income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act, 15 U.S.C. § 1691(a).
