Compliance with fair lending regulations has become dramatically more complex over the past several years. Although the underlying regulations have been in place for decades, monitoring by the Consumer Financial Protection Bureau’s (CFPB) Office of Fair Lending and Equal Opportunity, coupled with vigorous enforcement by the U.S. Department of Justice (DOJ), have increased lenders’ risk factors substantially.
Fair lending forbids discrimination based on “prohibited basis” factors: race, religion, ethnicity, national origin, gender, marital status, age, familial status, disability, receipt of income from public assistance sources, and the applicant’s exercise of rights under the Consumer Credit Protection Act. Problems can arise when lenders fail to monitor risk factors:
Underwriting. Lenders need to monitor and document any disparities in underwriting outcomes based on a prohibited basis as well as any inequitable application of exceptions to underwriting policies.
Pricing. Statistically significant differences in interest rates, fees, or other characteristics offered to applicants by prohibited basis create pricing risk.
Steering. It is illegal to steer members of a prohibited basis class to less favorable—often more costly—loan products. Offering similar if not identical products with different pricing through different business units can have the same effect as steering.
Servicing. Once all the loan documents have been signed and the customer is on board, posting of loan payments or waiving of late fees needs to be done equitably across a client base.
Redlining. Lenders need to be careful when analyzing where their customers live to avoid unintentionally redlining, which involves drawing red lines on a map around neighborhoods where lenders do not want to do business.
In February 2010, the DOJ established the Fair Lending Unit to focus on potential abuses in the consumer lending sector. Since then, the DOJ has filed or resolved 36 lending matters under the Equal Credit Opportunity Act, the Fair Housing Act, and the Servicemembers Civil Relief Act. Settlements have provided more than $1.2 billion in relief for affected communities and individual borrowers.
Although much of this money came from settlements with major lenders, in 2013 the DOJ reached settlements with four community banks that each had less than $400 million in assets. Many of these settlements—large and small—involved pricing discrimination against minority borrowers.
Proposed HMDA Reporting Requirements
On July 24, 2014, the CFPB issued a proposed rule for the expansion of data that lenders need to report under the Home Mortgage Disclosure Act (HMDA). The CFPB wants to use HMDA data to increase awareness of the housing market and, more broadly, the availability of credit. The most significant changes to the HMDA would include:
Mandatory reporting of home equity lines of credit (HELOCs) and reverse mortgages
Quarterly reporting for large institutions
Changes to reporting thresholds—a 25-loan minimum for depository institutions
Inclusion of an additional 37 data fields, some of which involve qualitative factors, expanded borrower data, or items related to qualified-mortgage and ability-to-pay rules
Banks and their boards can begin to prepare for the changes by discussing the following questions:
- How do we currently collect HMDA data?
- Can our existing staff collect and record the required data values?
- What steps are the developers of the mortgage application or underwriting system that we use taking to prepare for the changes?
- Do individuals responsible for potentially newly covered areas such as HELOCs and reverse mortgages have sufficient experience with the HMDA?
- Have we conducted data reviews to confirm accurate recording of HMDA data?
- Are we prepared for the potential implications of the new data disclosures? Regulators, consumer rights organizations, advocacy groups, competitors, and others will be looking at HMDA data.
Raising the Ante on Compliance
Compliance with fair lending regulations requires a greater focus on data integrity and the ability to manage statistical models than in prior years. Lenders that have not yet made the investment in internal and external resources to handle the new, expanded and increasingly sophisticated tasks need to consider steps to remain competitive in a challenging marketplace.