Fair Lending in the Real World
Compliance expert, Lisa Lugtigheid, shares common fair lending oversights and how to avoid them.
Generally, lenders know that fair lending requires a lender to treat similarly situated borrowers equally. But often, the devil is in the details. It can be difficult to spot fair lending violations in your own institution because it is hard to imagine you or any of your co-workers would ever intentionally discriminate against individuals based on a prohibited basis factor. But keep in mind, intent is not always required. Let’s take a look at some specific actions that have resulted in fair lending problems for lenders over the last few years.
Redlining in Online Marketing
There have been several lawsuits against social media advertisers in recent years. Essentially, these social media platforms allowed advertisers to select certain audiences for paid advertisements based on specific demographics and online behaviors. Advertisers were able to exclude certain categories of ad recipients based on criteria drawn from user’s profiles and online behavior, which included categories such as age, gender, and national origin, and even certain “affinity and interest relationships”, such as people interested in wheelchair ramps, parents with young children, Jewish individuals, and disabled veterans, to name just a few. Clearly this criteria selection suggests a greater propensity for the marketing audiences to fall under a prohibited basis category. Many of these cases against the social media platforms have since been settled, but there have been indications that lawsuits against individual advertisers will be considered as they are uncovered.
Be careful how you structure your marketing and outreach activities and be mindful of the selection criteria you are using. We often see lenders looking to market specific products only to a certain portion of their assessment area, even though the product is available to the whole assessment area. Exercise caution when doing this. If you find your marketing and outreach efforts are primarily concentrated in non-minority areas or targeted towards non-minority borrowers, but you are doing very little marketing and outreach to the minority areas and minority borrowers, you could easily have some fair lending issues.
Maternity Leave Discrimination
Another example of disparate treatment that has resulted in grief for many lenders is maternity leave discrimination. The Fair Housing Act prohibits discrimination based on familial status and ECOA/Regulation B prohibit discrimination on the basis of sex. However, some lenders have treated women on maternity leave differently than other loan applicants by mistakenly believing that both Fannie and Freddie’s underwriting requirements require a woman to have returned to work prior to closing on a loan. Both Freddie and Fannie as well as HUD have attempted to correct this misunderstanding by providing guidance.
Lenders should verify policies and procedures do not require a woman on maternity leave to have returned to work prior to closing on a loan. If selling on the secondary market, temporary leave income calculation requirements from the appropriate servicer guide should be reviewed.
Investors generally require borrowers on long-term disability to demonstrate that income will continue for a certain length of time. The long-term nature of the benefits is generally established by the type of benefits and/or the absence of a defined expiration date. Regardless, lenders have continued to request doctor notes outlining the medical reason for receipt of disability benefits to demonstrate the requisite continuation. Imposing such a requirement on applicants with disabilities is incredibly intrusive into the personal details of the applicants’ health. Neither Fannie, Freddie, nor HUD have any requirement that a lender obtain such personally sensitive information to demonstrate the long-term nature of the benefits. Doing so is clearly an ECOA/Regulation B violation for treating borrowers with handicaps differently by imposing more onerous requirements to divulge protected personal information in exchange for credit.
Fair lending covers all aspects of a loan relationship, including collection and loss mitigation. There have been numerous lenders over the years that have been found to have violated fair lending laws in their collection activities. These violations have taken many forms, such as making more advantageous debt settlement offers to non-minority borrowers, and foreclosing or taking other serious loss mitigation steps more quickly against minority borrowers. A lender will want to be sure that even during loss mitigation and collection there are clear procedures in place with systems and actions designed to treat all borrowers the same and on similar timelines.
Often lenders will provide credit assistance to borderline applicants. Methods can include reviewing credit reports in detail with the applicants in an attempt to uncover inaccuracies, as well as advice to credit applicants on how to improve credit scores. This too can cause fair lending implications if a lender is found to be providing this assistance in an unequal manner. For example, in 2016, the CFPB and Department of Justice announced a joint action against a very large lender for specifically implementing a policy of offering credit assistance to non-minority applicants, but directing employees to not offer the same assistance to African American applicants. Not only is this an appalling policy, but it became very costly for the bank as well. It should be noted that this was also one of the first times the CFPB used “mystery shoppers”, which were individuals sent in to apply for loans and report back their experiences.
While this was a particularly egregious fair lending violation, keep in mind that violations can also be more subtle. For example, imagine a lender has a letter that is sent along with denials informing the applicant of actions they can take to improve their credit score over the next year. If one Mortgage Loan Originator (“MLO”) regularly sends this letter to all applicants denied due to credit score problems and another MLO rarely sends the letter, the lender is engaging in a practice of unequal treatment to applicants. If the result is that individuals who fall under a prohibited basis are less likely to receive this letter, then a pattern of disparate treatment has emerged.
Mortgage Target Pricing
Some lenders who sell to the secondary market set a “target price” for each MLO, assigning a Minimum Base Price (MBP) that doesn’t take into account the objective factors of a borrower’s creditworthiness. This MBP is achieved through the combination of interest rate and/or discretionary fees charged to the borrower and can vary between MLO’s, with some having higher target price goals. While this practice complies with Reg. Z’s Mortgage Loan Originator Compensation Rule because the lender is setting one compensation arrangement with one target price for each MLO, this can still cause some unintended fair lending consequences.
If the MLO’s with the higher target pricing goals are serving portions of the lender’s assessment area with the highest minority neighborhoods, and the MLO’s with the lowest target pricing goals are serving low minority areas, pricing patterns can arise. The result is pricing disparities tend to develop whereby non-minority borrowers are getting loans with better pricing than minority borrowers. A lender with this type of pricing structure needs to take a closer look at how target pricing goals are affecting overall pricing trends for borrowers, including the APR, interest rates, and fees.
As you can see, fair lending violations can be somewhat elusive. While overt discrimination is a rarity by comparison, the real issues tend to be disparate treatment and disparate impact. Even well-intended lending practices can become problematic if regular monitoring and training is not implemented.
Temenos Compliance Advisory Live gives you front row access to our team of compliance experts in an open, virtual Q&A panel setting. As evolving regulatory requirements become further complicated by current events – Temenos Compliance Advisory Live is an effort to share knowledge and bring clarity to complex but timely regulatory topics. Watch the On-Demand Webinar covering Fair Lending here.
Join us September 23rd for Synergy, a Temenos Virtual Event including a Live Q&A Session with the Temenos Compliance Advisory Team covering topics such as; TRID updates, mortgage servicing challenges, deposit changes for 2020 (Reg C, Remittance Transfers (Red E), Reg D), Flood, and the Privacy Draft Bill in the House and how to plan for the future.