Fair Lending – Changes and New Challenges
Fair Lending has been the law of the land for many years. And many laws and regulations related to it have been passed:
The Equal Credit Opportunity Act (1974-Reg B)
The Truth-in-Lending Act (1968 – Reg Z)
The Home Mortgage Disclosure Act (1975 - HMDA).
Community Reinvestment Act (1977)*
These laws are in addition to many states’ specific requirements that have been added over the years. If anyone currently engaged in mortgage lending believes that fair lending is not a priority, they are sadly mistaken. The regulators take fair lending very seriously.
However, it is not just the laws and regulations on the books that are important, but it is how those laws and rules are interpretated and enforced by the various regulatory bodies, the Department of Justice, and the courts. Over the last several years, regulatory authorities have taken an increasingly broad view of the scope of fair lending. Fair lending is no longer solely having the same policies and procedures for everyone but also that the rules do not result in “disparate impact” to various demographic and ethnic groups.
* The Community Reinvestment Act, while not addressing protected class borrowers, does have provisions for fair lending regarding income level (Low, Moderate, Middle, and Upper).
Disparate Impact or Disparate Treatment?
Disparate Impact and disparate treatment are terms that refer to a lender’s actions that result in violations of fair housing or lending. Disparate impact can occur when a lender’s policies and procedures appear to be neutral however they result in different outcomes for different groups. Disparate impact is sometimes described as unintentional discrimination.
An example of disparate impact can be underwriting guidelines that address job stability. A borrower whose job is stable is certainly desirable for a lender. However, this can result in disparate treatment as it has been documented that low income and protected class borrowers often move from job to job over a period of term. Their job situation may not be stable; however, their income is stable. This neutral rule disproportionately results in lower approval rates for low income and protected class borrowers versus other applicants.
Disparate treatment occurs when actions by a lender whether intentional or not result in adverse outcomes for protected class borrowers. Disparate treatment is usually due to poorly written policies and/or lack of managerial oversight.
For example, a lender in a community with a high percentage of borrowers who have limited English proficiency (“LEP”), and the lender does not offer advertising or services in a particular language or does not provide reasonable accommodation and/or translation services for these borrowers could be construed as disparate treatment.
Recent Enforcement Actions
In the past, enforcement actions were taken against egregious violations of the various fair housing laws. However, these types of violations are rare today. Most regulators along with fair housing and lending advocates believe that violations today are more of the disparate impact variety. While outright disparate treatment is rare, unequal treatment of borrowers still exists.
By looking at recent enforcement actions and settlements from the DOJ and CFPB against banks and independent mortgage bankers, it is clear that there is a renewed emphasis on fair lending. These enforcement actions are taking place against banks and lenders and are primarily centered around redlining, HMDA compliance, and racial bias in appraisals.
The New Redlining
Redlining in mortgage finance is the restriction of mortgage credit in a particular area due to the demographic or ethnic characteristics of a community. These restrictions of credit may include less favorable lending terms as well as outright denials of credit.
The Department of Justice (“DOJ”) has recently reached a settlement with Fairway Independent Mortgage Corporation in Birmingham, Alabama over allegations that the lender had engage in a pattern or practice of redlining in and around Birmingham (see Office of Public Affairs | Justice Department Secures $8M from Fairway Independent Mortgage Corporation to Address Redlining in Black Communities in Birmingham, Alabama | United States Department of Justice ). The settlement between Fairway and the DOJ and Consumer Finance Protection Bureau (“CFPB”) exceeded $8 million.
The DOJ and the CFPB stated that Fairway was failing to serve majority Black neighborhoods in and around Birmingham. Fairway’s HMDA data reported that only 3.7% of applications were for properties in majority Black neighborhoods compared to local peer lenders whose application percentage was 12.2%. Despite knowing about this disparity, Fairway did not take action to bring it into line with peer lenders.
Fairway’s loan production offices and locations along with its marketing efforts were also reviewed by the DOJ and CFPB. Fairway operated three retail loan production offices in Birmingham, however, none were in majority Black neighborhoods. Further, the regulators concluded that Fairway’s marketing efforts were directed only toward majority white areas and the company’s loan officers were not trained to reach majority Black areas.
A similar case which resulted in a consent order was filed against Citadel Federal Credit Union of Exton, Pennsylvania addressing redlining of Black and Hispanic Communities ( Office of Public Affairs | Justice Department Secures Over $6.5M from Citadel Federal Credit Union to Address Redlining of Black and Hispanic Communities | United States Department of Justice ).
In this instance, the first of its kind against a credit union, the advertising of the credit union was focused on predominantly white neighborhoods around Philadelphia, Pennsylvania. As part of the consent order, Citadel was ordered to increase lending and outreach to Black and Hispanic areas of Philadelphia as well as open three branches within predominantly Black and Hispanic areas.
Key Takeaways - It is not enough to simply provide mortgage services in an area, but if a lender is active in a community, it must be active in all parts of the community. This includes access to lending offices and outreach to protected class communities. Failure to market due to race or ethnicity can result in severe consequences for a lender.
HMDA Compliance
The CFPB has also been active with stepped up enforcement of the reporting of HMDA data. Two recent actions include one against Freedom Mortgage for repeated errors in their HMDA data submissions and a second against Bank of America for routinely submitting falsified HMDA Data ( Federal Register :: Fair Lending Report of the Consumer Financial Protection Bureau ).
The actions against Freedom Mortgage were due to repeated errors in their HMDA Data. As a repeat offender, Freedom was already under a consent order from CFPB related to previous HMDA violations. The CFPB is currently seeking injunctive relief against Freedom for $3.95 million ( CFPB proposes $3.95M fine for Freedom Mortgage over false data accusations ).
Bank of America’s fine was even more dire: $12 million ( CFPB Orders Bank of America to Pay $12 Million for Reporting False Mortgage Data | Consumer Financial Protection Bureau ). In this action, the CFPB alleged that Bank of America Loan Officers failed to ask mortgage applicants certain demographic questions and then falsely reported that the applicants had chosen not to provide the information. Hundreds of Bank of America Loan Officers indicated that 100% of their applicants did not provide the information. CFPB indicated that Bank of America turned a blind eye to this information and did not exercise proper oversight for the actions of their loan officers.
Key Takeaways – CFPB takes HMDA data very seriously. Errors, whether intentional or not, can result in large penalties for a bank or lender. Failure to accurately report information related to race, ethnicity, lender file actions, and dates of disposition are all fair game for the CFPB.
Racial Bias in Appraisal
Some of the most recent actions regarding fair lending and fair housing have revolved around alleged racial bias in appraisal practice. Two prominent cases have settled over the past two years; one in Baltimore, Maryland ( Lawsuit Alleging Racial Bias in Home Appraisals Is Settled - The New York Times ) and another in Marin County, California ( Lawsuit sheds light on racial bias in appraisals for Black and Latino homeowners : NPR ). A new case against Rocket Mortgage has recently opened regarding lending in Denver, Colorado ( Justice Department sues Rocket Mortgage, others for biased appraisal ). In each of these instances, applicants believed that their properties were improperly valued at a lower amount due to their race.
Fannie Mae along with Freddie Mac and FHA have updated their selling guides mandating that lenders must follow a Reconsideration of Value procedure if applicants believe that their property has been improperly valued. Disclosures are required to be sent to the applicant at the time of loan application and the delivery of the appraisal to the applicant. In addition, these requirements must be clearly stated in the lender’s policies and procedures manual.
Key Takeaways – Regulatory authorities including the CFPB and DOJ are showing a renewed interest in potential racial bias in the appraisal process. Lenders can help avoid these allegations of participating in this bias by having properly documented policies and procedures for handling complaints of bias in the appraisal process.
Possible Upcoming Fair Lending Actions
While no one can predict where regulators and fair lending and housing groups will target next, one particular area is attracting a lot of attention: pricing concessions. While pricing concessions are allowed, application of pricing concessions are being monitored closely for bias between the classes or borrowers.
Another area that is being closely reviewed is related to file disposition and HMDA adverse action reporting. First, is the disposition properly documented? Does the reason for denial on the HMDA report match the statement of denial sent to the applicant? Has the lender given equal opportunity and time for an applicant to complete a loan transaction before it is closed for incompleteness? Do the adverse actions indicate that an unusually high percentage of withdrawn files come from a protected class?
While there have been no recent enforcement actions or consent orders regarding pricing concessions or HMDA data (outside of errors and falsifications), The Commonwealth Group believes these will be on the horizon and lenders must be prepared.
Summary and Recommendations
The Fair Lending landscape continues to evolve over time. Having a flat set of rules or operational practices that are rarely reviewed is a time bomb just waiting to go off. The best way for Banks, Independent Mortgage Bankers and Credit Unions to protect themselves from allegations of Fair Lending violations is to have up to date policies and procedures as well as a robust review of practices to ensure an acceptable level of oversight.
One way to help maintain compliance with Fair Lending standards is using independent groups such as The Commonwealth Group for reviews of policies and operations. The Commonwealth Group can provide valuable insights and advice to Banks, Independent Mortgage Bankers, and Credit Unions on a confidential basis to correct or head off potential Fair Lending violations and penalties. Contact us by email at [email protected] for more information on a confidential consultation.
West Beibers, CMB, AMP. CRU
CEO
The Commonwealth Group