Inter-agency Fair Lending Procedures Examples
Terms in this set (29)
(1) Example of OVERT EVIDENCE of Disparate Treatment:
A lender Offered a Credit Card with a Limit of up to $750 for Applicants Aged 21-30 AND $1,500 for Applicants Aged over 30.
ECOA Age Discrimination
(2) Example of OVERT EVIDENCE of Disparate Treatment:
A lending officer told a Customer "We do not like to make Home Mortgages to Native Americans, but the law says we cannot discriminate and we have to comply with the law"
VIOLATION of FHAct prohibition on statements Expressing Discriminatory preference & ECOA discouraging applicants on a prohibited basis
(1) Example of COMPARATIVE EVIDENCE of Disparate Treatment:
White Couple applied for an Auto Loan. The lender found adverse information in the Couple's Credit Report. Lender discussed the Credit Report with the couple and found the adverse information was Incorrect. White Couple was granted the loan.
Minority Couple applied for a similar loan with the Same lender. The lender denied the loan upon finding Adverse Information without giving opportunity to discuss the credit report with the Minority Couple.
(2) Example of COMPARATIVE EVIDENCE of Disparate Treatment:
Two Minority loan applicants were told that it would take several hours and require the payment of an application fee to determine whether they would qualify for a home mortgage loan.
In contrast, a loan officer took financial information immediately from White applicants and determined whether they qualified in minutes, without a fee being paid. The lender's differential treatment violated both the ECOA and the FHAct.
(3) Example of COMPARATIVE EVIDENCE of Disparate Treatment:
Two minority borrowers inquired with a lender about mortgage loans. They were given applications for fixed-rate loans only and were not offered assistance in completing the loan applications. They completed the applications on their own and ultimately failed to qualify.
Two similarly situated White borrowers made an identical inquiry about mortgage loans to the same lender. They were given information about both adjustable rate and fixed-rate mortgages and were given assistance in preparing application that the lender could accept.
(4) Example of COMPARATIVE EVIDENCE of Disparate Treatment:
A lender rejected a loan application made by a female applicant with flaws in her credit report but accepted applications by male applicants with similar flaws.
The lender offered the explanation that the rejected application had been processed by a new loan officer who was unfamiliar with the bank's policy to work with applicants to correct credit report problems.
However, an investigation revealed that the same loan officer who processed the rejected application had accepted applications from males with similar credit problems after working with them to provide satisfactory explanations.
(1) Example of DISPARATE IMPACT:
There is a Policy to NOT Extend Loans for Residences for Less than $60,000. The policy has been in effect for 10 years. Minimum Loan amount in the policy EXCLUDES potential minority applicants because of their Income Levels or Values of Homes in the area they live.
The fact that the policy or practice creates a disparity is NOT PROOF alone of a violation.
When an agency finds that a Lender's policy or practice has a DISPARATE IMPACT, the next step is to seek to DETERMINE whether the policy or practice is JUSTIFIED by a
The "BUSINESS NECESSITY" Justification MUST BE Manifest and May Not Be Hypothetical or Speculative.
(Even if there is a business necessity it could still be discriminatory if it could be replaced by a policy or practice that could serve the same purpose with less discrimination)
(2) Example of DISPARATE IMPACT:
In the past, lenders primarily considered net income in making underwriting decisions. In recent years, the trend has been to consider gross income. A lender decided to switch its practices to consider gross income rather than net income.
However, in calculating gross income, the lender did not distinguish between taxable and nontaxable income even though nontaxable income is of more value than the equivalent amount of taxable income.
The lender's policy may have a disparate impact on individuals with disabilities and the elderly, both of whom are more likely than the general applicant pool to receive substantial nontaxable income.
The lender's policy is likely to be proven discriminatory.
First, the lender is unlikely to be able to show that the policy is compelled by business necessity.
Second, even if the lender could show business necessity, the lender could achieve the same purpose with less discriminatory effect by "grossing up" nontaxable income
(i.e., making it equivalent to gross taxable income by using formulas related to the applicant's tax bracket).
When doing a comparative file review:
Control group applicant's DTI ratio was LOWERED to 42% because the Bank decided to include short-term Overtime Income and
A Prohibited basis group applicant was Denied due to "Insufficient Income" would have ratio drop from 46% to 41% if Short Term Overtime Income has been considered, Then the
EXAMINER should Consider 41%, in determining the Benchmark
Example of Potential Steering products or features & their alternatives offered by the bank, affiliate, or subsidiary:
Stated Income, Negative Amortization, and Option-ARMs
Example of Potential Steering terms or features offered by the bank, affiliate, or subsidiary:
Prepayment Penalties and Escrow requirements
Interest Rates, points, fees, etc
Steering examination procedures:
If Criteria for Receiving a
"More Favorable" Prime Mortgage
was a back-end ratio of 38%,
Review spreadsheets to see if it was Adhered to, If different then subsequent discussion are needed.
Second Review Programs
It is permissible to review the proposed denial of applicants who are members of a Protected Class by comparing their applications to the approved applications of similarly qualified individuals who are not members of a protected class to determine if the applications were evaluated consistently.
It is NOT Permissible, however, to review the applications of members of a protected class IN ORDER TO APPLY STANDARDS to those Applications different from the standards used to evaluate other applications for the same credit program or to apply the same standards in a different manner, UNLESS such actions are otherwise permitted by law
Other types of second review programs are also permissible.
Lenders could review the proposed Denial of All Applicants within a certain income range
Lenders also could review a sampling of all applications proposed for denial, or even review all such applications
Generally, a lender that applies different lending standards or offers different levels of assistance on a prohibited basis, regardless of its motivation, would be violating both the FHAct and the ECOA.
There are exceptions to the general rule; thus, applying different lending standards or offering different levels of assistance to applicants who are members of a protected class is permissible in some circumstances.
For example, the FHAct requires lenders to provide reasonable accommodation to people with disabilities. In addition, providing different treatment to applicants to address past discrimination would be permissible if done in response to a court order or otherwise in accord with applicable legal precedent
Affirmative advertising and marketing efforts that do not involve application of different lending standards are permissible under both the ECOA and the FH Act.
For example, special outreach to a minority community would be permissible.
Self-testing and corrective actions do not expunge or extinguish legal liability for the violations of law, insulate a lender from private suits, or eliminate the primary regulatory agency's obligation to make the referrals required by law.
However, they will be considered as a substantial mitigating factor by the primary regulatory agencies
when contemplating possible enforcement actions.
A Bank is
required to report to the Agencies a lending discrimination problem it has discovered in Self-Testing.
However, a lender that reports its discovery can ensure that the corrective actions it develops are appropriate and complete and thereby minimize the damages to which it will be subject.
Fair lending violations can occur even in the most well-run lending institutions that have good policies in place
to ensure compliance with fair lending laws and regulations.
Of course, the chances that such violations will occur
can be greatly reduced by backing up those policies with proper employee training and supervision and
subjecting the lending process to proven systems of oversight and review.
Self-testing can further reduce the likelihood that violations may occur. Notwithstanding these efforts, a single loan officer might still improperly apply policies or, worse yet, deliberately circumvent them and manage to conceal or disguise the true nature of his or her practices for a time.
It may be particularly difficult to discover this type of behavior when it occurs in the pre-application process.
In any case where discriminatory lending by a lending institution is identified, the lender will be expected to identify and fairly compensate victims of discriminatory conduct just as it would be expected to compensate a
customer if an employee's conduct resulted in physical injury to the customer.
In addition, such a violation might constitute a "pattern or practice" that must be referred to DOJ or a violation that must be referred to HUD.
As in other cases of discriminatory behavior, where a lender takes self-initiated corrective actions:
Such actions will be
considered as a substantial mitigating factor by the Agencies in determining the nature of any Enforcement Action and what penalties or other relief would be appropriate
If the FDIC has
"REASON TO BELIEVE"
that a Lender has engaged in a
Pattern or Practice of Discrimination in Violation of ECOA
ECOA Requires the FDIC to Refer the Matter to DOJ.
"REASON TO BELIEVE"
A federal financial institutions regulatory agency has reason to believe that an ECOA violation has occurred
when a reasonable person would conclude from an examination of all credible information available that discrimination has occurred.
This determination requires weighing the available evidence and applicable law and determining whether an apparent violation has occurred.
Information supporting a reason to believe finding may include loan files and other documents, credible observations by persons with direct knowledge, statistical analysis, and the financial institution's response to the preliminary examination findings.
The evidence of discrimination
NEED NOT be definitive and NEED NOT include evidence of overt discrimination
It should be developed to the point that a reasonable person would conclude that a violation exists.
The employment of only Few Minorities and Others in Protected Classes, in itself is
NOT a VIOLATION of FHAct or ECOA
Employment of only a few members of protected Classes in Lending Positions
CAN CONTRIBUTE to a CLIMATE
in which Lending Discrimination
by Affecting the delivery of services.
Many lenders make mortgage loans only when they can be sold on the secondary market, or they may place some loans in their own portfolios and sell others on the secondary market. The principal secondary market
purchasers, Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"), publish underwriting guidelines to inform primary lenders of the conditions under which they will buy loans.
For example, ability to repay the loan is measured by suggested ratios of monthly housing expense to income (28%) and total obligations to income (36%).
However, these guidelines allow considerable discretion on the part of the primary lender. In addition, the secondary market guidelines have in
some cases been made more flexible, for example, with respect to factors such as stability of income (rather than stability of employment) and use of nontraditional ways of establishing good credit and ability to repay (e.g. use of past rent and utility payment records.)
Lenders should ensure that their loan processors and underwriters are aware of the provisions of the secondary market guidelines that provide various alternative and flexible means by which applicants may demonstrate their ability and willingness to repay their loans. Fannie Mae and Freddie Mac
not infrequently purchase mortgages exceeding the suggested ratios, and their guidelines contain detailed discussions of the compensating factors that can justify higher ratios (and which must be documented by the primary lender).
A lender who rejects an application from an applicant who is a member of a protected class and who has ratios above those of the guidelines and approved an application from another applicant with similar ratios:
Should be prepared to show that the reason for the rejection was based on factors that are applied
Consistently without regard to any of the Prohibited Factors
Enforcement Actions and remedial measures for lending discrimination violations
VARY depending on whether such sanctions are sought by:
FDIC, DOJ, HUD or other federal agencies charged with enforcing either the ECOA or the FHAct.
FDIC is Authorized to use the FULL RANGE of their Enforcement Authority to Address Discriminatory Lending Practices, INCLUDING:
that MAY REQUIRE Both
Prospective and Retrospective Relief
- Civil Money Penalties on the Bank or IAPs (depending on nature of violation and culpability;
- Removal or Prohibition.