QUESTION
A banking department has cited us for a violation of the Equal Credit Opportunity Act, Regulation B. The allegation is that we denied several loans on the basis of sexual orientation. The applicants filed a complaint with the department. I will state the basis of the complaints. Based on their investigation, they issued an administrative demand to review our loan originations for the last three years.
Other banking departments seem to be interested in this matter and have sent us document requests for loan files and loan logs. When I joined the company as its General Counsel two years ago, I undertook a review of administrative actions going back several years. Nothing like this happened. For the years I reviewed, we did not have complaints caused by violations of Regulation B, particularly, adverse action.
In drafting our response to the department, I relied on case law, best practices, and specific regulatory guidelines. To ensure I have a deeper understanding of our legal exposure, I want your input on potential procedures that may cause a violation of the ECOA based on sexual orientation.
What are potential procedures that may cause a violation of the ECOA based on sexual orientation?
SOLUTION
RESPONSE
The Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, prohibits discrimination on a prohibited basis in any aspect of a credit transaction. Prohibited bases under the ECOA are: race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the applicant's income being derived from public assistance; or the applicant's exercise in good faith of any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Consumer Financial Protection Bureau (CFPB).
For any rejected application, you should provide a written notice that clearly explains the specific principal reason(s) for the decision. The notice must also include the ECOA disclosure and the name of the appropriate federal enforcement agency.
The prohibited basis doctrine, as applied to sex, includes sexual orientation and gender identity. The Supreme Court ruled, in 2020, in Bostock v. Clayton County that the federal law prohibiting discrimination in employment based on a person's sex includes gender identity and sexual orientation.
Following this decision, certain federal agencies with regulatory authority for sex discrimination were directed to review their agency procedures and determine whether actions should be taken to align them with the Bostock decision. Subsequently, the CFPB issued an interpretive rule clarifying that the ECOA and Regulation B apply to discrimination in credit transactions based on a person's sexual orientation and/or gender identity. The rule also provided guidance to clarify the requirements.
The FHA prohibits discrimination based on race, color, religion, sex, familial status, national origin, or disability in the sale, rental, and financing of housing. In 2021, the Department of Housing and Urban Development confirmed that discrimination based on sexual orientation is a violation of the FHA.
In light of this change, lenders sought to mitigate this risk by updating their policies and procedures to align with the change. For instance, many lenders now include a statement of nondiscrimination in their loan policy, loan advertisements, and applicant disclosures, and on their websites to reflect the ECOA's requirements. Lenders should update these documents to indicate they do not discriminate on the basis of sex, including sexual orientation or gender identity. We have continually urged our clients to conduct staff training on this issue.
Because your question is very specific with respect to procedures, I am going to keep this article narrowly focused on methods and procedures to prevent violations of ECOA based on sexual orientation. There are surely three actions that must be done to avoid such violations. In my view, these would be
(1) ensuring
that policies and procedures are updated,
(2) training
all affected personnel, and
(3) removing such discriminatory practices from credit decisions.
I will treat them here, with the caveat that implementing these actions correctly and legally throughout the mortgage process requires a rather extensive implementation of various regulations, federal and state, a review that is far beyond the reach of this article.
POLICIES AND PROCEDURES
Financial institutions should audit and revise their fair lending program to explicitly prohibit discrimination based on sexual orientation and gender identity, including discrimination based on:
· Perceived nonconformity with gender stereotypes, and
· Associations with individuals of a certain sexual orientation or gender identity, such as a same-sex spouse or partner.
You should have a "zero-tolerance" policy with respect to discrimination. You must clearly and unambiguously prohibit discrimination based on sexual orientation, gender identity, and perceived nonconformity to gender stereotypes in all aspects of a credit transaction, including marketing, underwriting, and loan servicing.
To ensure you are following through on a zero tolerance policy, you should review and revise policies to ensure that credit decisions rely solely on legitimate, non-discriminatory factors such as credit history, income, and assets. For instance, a creditor cannot decline a loan application from a male applicant who is attracted to men for a reason that would be tolerated in a female applicant.
And, you should prevent unwarranted adverse actions against an applicant based on their association with a same-sex partner, spouse, or other LGBTQ+ individuals. For instance, a lender cannot require different or more difficult documentation for a same-sex married couple than for an opposite-sex couple.
TRAINING
To prevent conscious or unconscious bias, you should be training all employees involved in the lending process on the ECOA and the CFPB's interpretive rule. Educate new and current employees, management, and loan officers on fair lending laws, with specific emphasis on preventing discrimination based on sexual orientation and gender identity. We suggest that the training should emphasize the following:
· Credit decisions must be based solely on an applicant's creditworthiness.
· Lenders must not express or imply, verbally or in writing, any preference or discourage applicants based on sexual orientation or gender identity.
· Loan officers must use identical standards and services for all applicants, regardless of their sexual orientation.
CREDIT DECISIONS AND ADVERTISEMENTS
Creditors should review their credit products and marketing to ensure they do not result in discriminatory outcomes. The following constitutes three principal areas where sexual orientation violations may be triggered.
Underwriting and Pricing
Check automated underwriting systems for variables that
could act as proxies for sexual orientation or gender identity. There is plenty
of litigation and banking department concerns where some creditors permit
discretionary rate and terms adjustments, which can lead to disparities. Ensure
that the rate and term structure is based on creditworthiness alone.
Stereotype-based Decisions
Eliminate any practices motivated by stereotypes. For
instance, a lender cannot require different documentation from a same-sex
couple for a mortgage than from an opposite-sex couple. Similarly, a lender
cannot treat a customer differently based on their appearance or attire.
Marketing Materials
Avoid using marketing or advertising that signals a preference for or against certain sexual orientations or gender identities. For example, marketing campaigns should not exclude LGBTQ+ individuals or communities. Periodically assess marketing materials and outreach efforts to confirm they do not selectively discourage or target applicants on the basis of sexual orientation.
PROACTIVE METHODS
I appreciate that, upon joining the company, you conducted a review of administrative actions spanning several years. That was really smart! Being proactive is essential. I have said many times that for compliance to be effective, it must be proactive! Even if you find flaws and defects in the compliance management system, most regulators will be satisfied to know that you took proactive measures to control and reduce compliance risk.
Here are a few proactive methods you can implement immediately to ensure fair lending oversight and monitoring.
Complaint Review
Implement a system to review and document all customer complaints related to alleged discrimination. Look for patterns or allegations that may indicate a systemic issue. I also suggest that you create a mechanism for employees and applicants to report any suspected discriminatory practices. Encourage third-party reporting by informing applicants of their right to file a complaint with federal agencies like the CFPB, FTC, and HUD, or non-profits like the National Fair Housing Alliance.
Monitor Loan Files
Conduct regular internal audits of loan files to ensure compliance with fair lending policies. Compare the treatment of different applicants to confirm consistency and that legitimate factors fully explain credit decisions. Regularly examine rejected or withdrawn applications to identify any potential disparate treatment of applicants who are in same-sex relationships.
Record
specific, legitimate, and non-discriminatory reasons for denying credit. Use
rate and exception logs to document loan applications from same-sex couples
that are denied for reasons other than a failure to meet written underwriting
standards.
Risk Assessment
Perform a fair lending risk assessment to identify and address any potential vulnerabilities in the company's lending practices. For instance, our Compliance Tune-up series is a Second Line of Defense risk assessment targeting departments and functions.
Audit Servicing and Collection Practices
Ensure that your fair lending policies extend beyond the application process to encompass refinancing and collection procedures.
Corrective actions
If any fair lending issues are discovered, you should take prompt and appropriate corrective action, including:
· Retraining employees,
· Revising policies and procedures,
· Remediating customers who may have been harmed, and, if called for,
· Notifying federal regulatory agencies like the CFPB if potential violations are found.
I have outlined
many aspects of the protections against sexual discrimination. These
protections apply at every stage of the mortgage process, including approvals,
terms, advertising, servicing, and property appraisals. Many states and
locations have their own laws that offer similar or even broader protections
against discrimination.
