Fair Lending
2001
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
Communicate
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Smile :)
Speak - follow up
Welcome
Offer to help
Thank the
customer
The 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
• Fair Housing Act (FHA-1968)
• Equal Credit Opportunity Act (ECOA1974)
• Home Mortgage Disclosure Act
(HMDA-1975)
• Community Reinvestment Act (CRA1977)
Equal Credit Opportunity Act
General Purpose
•Promote equal availability to credit
by all credit worthy applicants
Prohibited 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 Aspects
ECOA
• Taking
applications
• Evaluations of
apps
• Extending credit
• Credit Admin. &
servicing
• Collection
activities
FHA
• Loans to buy,
build, repair,
improve dwelling
• Purchase or rental
of residential
dwellings
• Selling, brokering,
or appraising
Types of Lending
Discrimination
• Overt Discrimination
• Disparate Treatment
• Disparate Impact
Overt 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 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 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 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 Credit
• December 1999
• Disparate treatment
• Discrimination against unmarried coapplicants - not counting both
incomes
• Paid fine of $650,000 to federal
government
Capital 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 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 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
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Civil Action
Class Action
Reputation risk
Regulators
Dept of Justice
HUD
The 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
Thank you. Please turn in evaluations