On 12/3/18, the Federal Reserve, FDIC, OCC, NCUA, CFPB and Department of Justice hosted a joint webinar on fair lending hot topics. The webinar covered a number of topics including redlining, examination scoping, pricing risks, marital status discrimination, disability and maternity leave discrimination, a HMDA update, and a question and answer session. Overall, the webinar did not provide any ground-breaking statements as most everything discussed has been brought up previously.
The webinar began with an overview of Redlining by the Department of Justice (DOJ) and provided a discussion on the litigation against KleinBank, located in the Minneapolis, MN area. While the FDIC did have initial concerns with KleinBank, the DOJ explained that they have independent authority and don’t actually need a referral from a regulatory agency to investigate a financial institution for a potential fair lending violation. KleinBank was the first bank to not settle with the DOJ and to go to court to fight the allegations that they redlined minority census tracts in the Minneapolis St. Paul area. Among other things, the Bank had all of their branches located in primarily white census tracts and their assessment area was found to arbitrarily exclude minority census tracts. The Bank filed a motion to dismiss, but the ruling (from two different judges) denied the motion to dismiss, citing cause to allow the case to continue including:
Klein Bank established lending boundaries which specifically excluded majority-minority areas
The Bank was purposeful in avoiding majority-minority areas
Klein Bank made intentional decisions regarding where to (and where not to) market services, which often excluded majority-minority areas
Ultimately, KleinBank - which has now sold to another bank - chose to settle with the DOJ. The DOJ concluded with a summary of the settlement, including:
Expanding the CRA Assessment area
One new full-service branch
$300,000 to advertising, outreach, financial education, and credit repaid
$300,000 loan subsidy fund
Community Development Officer
Fair lending training
Annual reporting
The webinar next focused on a discussion on how the FDIC conducts a fair lending exam. The presentation discussed the scoping process and how the FDIC determines what to focus on during an examination.
The OCC then talked about mortgage pricing risks including third party originator risks and pricing exceptions and discount programs. Increased risks from third party originators can come from:
Policies that allow for broad pricing discretion
Failure to conduct proper monitor of whether third parties are following bank policies
Failure to take appropriate action when bank’s policies are not followed
Failure to monitor whether bank’s policies result in differences correlated with prohibited basis characteristics
Pricing execution and discount risk can be found when:
Exception and discount programs that are not well defined
Exceptions are not adequately tracked and monitored
A large volume of exceptions can create fair lending risk, especially if correlated with prohibited basis characteristics
Inadequate or incomplete documentation of borrowers’ qualifications for any particular discount pricing program
Inadequate monitoring of data
Monitoring data can help ensure the exception or discount program does not result in disparities based on a prohibited basis
The NCUA then discussed marital status discrimination. The presenter began with a discussion on spousal signatures, including requiring the signature of non-owner spouse on a business loan. One example of a policy discrimination includes:
“When determining the interest rate for a loan, if two or more scores are offered, the credit union will observe the following criteria: If the loan has joint sighers, the rate will be based on the higher of the two scores unless the joint signers are not married, then the rate will be based on the primary borrower.”
The Federal Reserve then discussed disability and maternity leave discrimination. The presenter explained that problems can occur when:
The bank has different verification requirements for applicants who receive disability income
Requires verification of disability (e.g. a letter from a doctor, medical records, or other information)
Requires verification of continuation of receipt of disability income for set time period (e.g. a special letter from SSA or a letter from a doctor)
The bank does not have policies or procedures specifying how disability income should be treated or has inconsistent policies
Allows loan officers the discretion to determine what information is collected, such as information about the nature of the disability
Does not provide training regarding appropriate documentation for disability income.
The presenter then discussed maternity Leave risk can be elevated when:
The bank does not have policies or procedures specifying how maternity leave should be treated or has inconsistent policies
Allows loan offers the discretion to determine how leave should be classified
Does not provide training
The bank does not monitor its underwriting policies to ensure consistent application of a policy.
This portion of the webinar concluded with some tips to reducing fair lending risk such as having policies and procedures regarding the appropriate documentation of disability income and having policies and procedures regarding the verification of maternity leave.
The CFPB then held a discussion on HMDA. This discussion focused on the 2018 interpretive rule and did not appear to provide any new guidance. The CFPB also reminded attendees of the December 2017 HMDA compliance statement that the CFPB does not intend to require resubmission unless data errors are material and the CFPB does not expect to assess penalties.
The webinar concluded with a question and answer session.
An archive of the Fair Lending Hot Topics webinar can be found here. https://consumercomplianceoutlook.org/outlook-live/archives/