Fair LendingFair Lending

2001

Why are you here?Why are you here?• Everyone has contact with customers

• You may be the first to be approached regarding a loan

• Know who to refer the customer to

• Show interest and respect for the customer

CommunicateCommunicate• Smile :)

• Speak - follow up

• Welcome

• Offer to help• Thank the

customer

The MessageThe Message• You like working here - – it’s a good place to be

• It’s a good place for the customer to be

• Know and understand the bank’s products and services

• Communicate respect and interest

The Four Fair Lending Laws

The Four Fair Lending Laws

• Fair Housing Act (FHA-1968)

• Equal Credit Opportunity Act (ECOA-1974)

• Home Mortgage Disclosure Act (HMDA-1975)

• Community Reinvestment Act (CRA-1977)

Equal Credit Opportunity ActGeneral Purpose

Equal Credit Opportunity ActGeneral Purpose

•Promote equal availability to credit by all credit worthy applicants

Prohibited BasesProhibited Bases• FHA

– Race or color– Religion– National Origin– Sex– Familial status– Handicap

• ECOA

– Race or color– Religion– National

Origin– Sex– Marital status– Age– Receipt of

public assistance

Covered AspectsCovered Aspects

• Taking applications• Evaluations of apps• Extending credit• Credit Admin. &

servicing• Collection activities

• Loans to buy, build, repair, improve dwelling

• Purchase or rental of residential dwellings

• Selling, brokering, or appraising

ECOA FHA

Types of Lending Discrimination

Types of Lending Discrimination

• Overt Discrimination

• Disparate Treatment

• Disparate Impact

Overt DiscriminationOvert Discrimination

• Openly or blatant discrimination on a prohibited basis

• Expressing a discriminatory preference, even without acting on the preference– “We don’t like to make loans to------but”– Credit limits based on age

Disparate TreatmentDisparate Treatment

• Different treatment based upon one of the prohibited factors

• Intent does not matter - More subtle• Lender cannot provide a credible and

legitimate nondiscriminatory explanation

• Occurs with marginal borrowers• Red-lining and Reverse Red-lining

Disparate ImpactDisparate Impact• Lender applies a policy or practice

uniformly to all credit applicants, BUT

• Creates an adverse impact on applicants from a protected class

• Example - loan minimums, gross income

• Manifest business necessity has to be established - “Prove it”

Predatory PracticesPredatory Practices

• Unaffordable loans based on assets rather than ability to pay;

• “Flipping” Inducing repeated refinances - high points, fees;

AND• Engaging in fraud or deception • Taking advantage of “unsuspecting or

unsophisticated” borrowers.

Household International

• May 14 2001 - Advocacy group pickets

• Nationwide protests - predatory practices– Targeting low-income borrowers– Exorbitant rates, overpriced credit

insurance–Misleading terms

• Urging investors to sell their stock

Ford Motor CreditFord Motor Credit

• December 1999

• Disparate treatment

• Discrimination against unmarried co-applicants - not counting both incomes

• Paid fine of $650,000 to federal government

Capital City MortgageCapital City Mortgage• 1998• Predatory practices– reverse redlining– targeted African-American communities– high rates, fees, misleading borrowers

• Products designed to fail - makes housing unavailable

• Discrimination based on race

Hot Topics• Predatory

practices

• Subprime lending

• Credit Scoring

Subprime LendingSubprime Lending

• Important lending product• Enhances and meets the needs of

borrowers with impaired credit;

• Reduced repayment capacity - – credit report– debt-to-income ratios

Subprime gone badSubprime gone bad• Vulnerable borrowers - lean

resources

• Measurements of subprime category applied after loan decision;

• Steering to subprime products;

• High rates - High pre-payment penalties

• Use of non-standard ARM indexes

Avoiding Fair Lending Problems

• Strong written loan policy

• Strong underwriting standards– consistency, level of assistance,

overrides – Policy V. Practice

• Fair lending training– at least annually for all lenders, front

line

• Second review process - denials

Consequences of Noncompliance

Consequences of Noncompliance

• Civil Action

• Class Action

• Reputation risk

• Regulators

• Dept of Justice

• HUD

The FutureThe Future• What do we know and where to go

from here?• Proposed revisions to Truth in

Lending and RESPA• Closer scrutiny of consumer and

commercial loans• Consumer loans• Vigilance - what is your bank doing,

where, with whom and what it means.

Curtain down - Applause

Curtain down - Applause

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