Fair Lending is a large umbrella category encompassing a number of laws and regulations enacted to prevent discriminatory behavior against consumers by financial institutions. Under statutes like the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Community Reinvestment Act (CRA) and the Home Mortgage Disclosure Act (HMDA), financial institutions are prohibited from discriminating on the basis of race, religion, national origin, gender, marital status, age, handicap, familial status and income derived from public assistance, among other factors.
None of these regulations are new, but Fair Lending continues to be a hot button with regulators, often leaving financial institutions asking, “Why? What changed?” One notable change is the addition of the Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP) to virtually all examinations. Beyond the overlay of UDAAP, there have been no recent material changes to the suite of Fair Lending regulations itself. The appearance of change stems instead from the recent heightened and broadened application of existing laws.
Financial institution leaders must ensure their entire teams are aware of the far reach of the underlying Fair Lending regulations and stay up-to-date on training in order to maintain compliance.
Fair Lending enforcement and intersection with UDAAP
An important component of Fair Lending enforcement is the overlap of regulatory authority. If discrimination is found, it may violate multiple regulations and require simultaneous examination by different enforcement agencies. This could result in a financial institution being fined for the same violation pursuant to different regulations. A good example of this would be a lender’s consistent failure to issue mortgages to individuals with a certain credit score, which is a violation of the ECOA investigated by the Consumer Financial Protection Bureau (CPFB) and also a violation of the FHA investigated by the U.S. Department of Housing and Urban Development.
Related to but distinct from Fair Lending laws, UDAAP is a newer regulation that was recently broadened by the addition of the term “abusive.” UDAAP is a catch-all for infractions that cannot be easily categorized under one of the Fair Lending laws, and it applies to virtually every aspect of the banking relationship, from marketing to servicing to collections. It is widely used on the deposit side of banking, due to the lack of similar fair deposit regulations.
Fair Lending scrutiny intensified
Previously, the focus of Fair Lending revolved primarily around FHA and ECOA, as they apply to loan originations. Over recent years, however, the scope and scrutiny has intensified to include the full span of the lending relationship, namely loan servicing.
This means that the entire credit lifecycle, from the loan application and origination to request for modification or refinancing, is now examined for discriminatory practices or actions. Even the information on a loan applicant’s credit report, under the FCRA, is subject to scrutiny and may fall under the Fair Lending authority. If regulators do not find a Fair Lending violation, they’ll also apply the UDAAP filter to catch any misdeeds under that umbrella, creating a domino effect of violations.
Going forward, there is no indication that Fair Lending scrutiny will slow down. In fact, the collection and maintenance of additional data may be required under ECOA, as seen on the CFPB’s Rulemaking Agenda. Dodd-Frank’s amendments to ECOA will require financial institutions to report information concerning credit applications made by women-owned, minority-owned and small businesses. While this particular ECOA amendment is still in the pre-rule stage, it provides a glimpse into the future focus of Fair Lending examinations.
Fair Lending best practices
Over the past few years, there have been several significant legal actions against financial institutions for Fair Lending violations. Financial institutions can stay in compliance with this suite of regulations by instituting and maintaining a regular training program for all affected employees, including the Board of Directors.
Instead of waiting for a Fair Lending examination to strike, institutions can be proactive and conduct a self-evaluation or self-test to assess compliance. Examples of self-evaluation actions include a second review of denied loan applications, an analysis of HMDA data for disparities and close monitoring of lending policy exceptions, particularly pricing. In a self-test exercise, the institution could use surveys of loan applicants or “mystery shoppers” to solicit feedback or test its process.
The implications for noncompliance with Fair Lending laws are serious. Downgrades in key compliance ratings, legal risks, reputational damage, delay or denial of corporate applications, civil monetary penalties and restitution to affected borrowers are all examples of costly potential repercussions. RKL’s compliance team can help financial institutions shore up their compliance procedures and implement best practices. Contact us today to get started.