By André B. Cotten, Regulatory Compliance Counsel
Lately, we've been receiving some questions stemming from fair lending issues that came up during NCUA examinations. We will review some of these today, but overall credit unions can take a variety of actions to proactively address fair lending risk. These actions include carefully drafting fair lending policies and procedures, training employees, performing risk assessments and ongoing monitoring of compliance with fair lending laws.
Fair lending laws are designed to provide fair and equal access to credit, based on individual creditworthiness, without regard to a prohibited basis such as race, gender or national origin. Fair lending laws include the Equal Credit Opportunity Act (Regulation B), Home Mortgage Disclosure Act (Regulation C), and Fair Housing Act.
From a litigation perspective, discrimination cases are often based on one of two theories – “disparate treatment” or “disparate impact.” A standard disparate treatment case involves a conscious decision by the credit union to discriminate against an applicant on a prohibited basis. On the other hand, disparate impact cases are far more nuanced and fact intensive. These types of cases involve a facially neutral policy that has a disparate impact (or disproportionately burdens) members of a protected class. Disparate impact cases do not require applicants to demonstrate an intent to discriminate and may be proven using statistical evidence.
Credit unions, however, may defend against a “disparate treatment” case by arguing that challenged practices are necessary to achieve one or more substantial, legitimate, and nondiscriminatory interests. These cases tend to be fact intensive so it is difficult to speculate how a judge and jury would decide a particular matter without knowing all of the facts beforehand, and overall can require consulting with local counsel.
However, from a compliance prospective, some issues our members have asked about recently include questions regarding advertising, training and audits.
Marketing and Advertising
In regards to marketing, the fair lending rules apply from the outset of the transaction which includes marketing. The FFIEC Fair Lending Examination Manual contains a detailed discussion of the types of practices that examiners look for when determining whether a credit union has engaged in prohibited marketing, I have included an excerpt below:
“Indicators of potential disparate treatment in Marketing of residential products, such as:
M1. Advertising patterns or practices that a reasonable person would believe indicate prohibited basis customers are less desirable.
M2. Advertising only in media serving non-minority areas of the market.
M3. Marketing through brokers or other agents that the institution knows (or has reason to know) would serve only one racial or ethnic group in the market.
M4. Use of marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the institutions assessment or marketing area that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area.
M5. Using mailing or other distribution lists or other marketing techniques for pre-screened or other offerings of residential loan products that:
Explicitly exclude groups of prospective borrowers on a prohibited basis; or
Exclude geographies (e.g., census tracts, ZIP codes, etc.) within the institution's marketing area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.
M6. Proportion of prohibited basis applicants is significantly lower than that group's representation in the total population of the market area.
M7. Consumer complaints alleging discrimination in advertising or marketing loans.”
The full examination guide can be found here, the disparate impact in advertising section begins on p. 11:
http://www.ffiec.gov/pdf/fairlend.pdf
Training
Training is essential part of maintaining fair lending compliance. According to the NCUA guide, Fair Lending Compliance Best Practices for Federal Credit Unions, "[f]air lending training should be provided for all credit union employees and officials involved in the lending process. Include training for employees who take applications, originate loans, service loans, and collect delinquent loans. The supervisory committee and internal audit staff should also incorporate an assessment of compliance with the credit union’s fair lending policies as a component of their review procedures."
In regards to ECOA (Reg B), The Fair Lending Guide issued by NCUA's Office of Consumer Financial Protection and Access gives similar guidance for credit unions: "Provide training to all employees involved in any aspect of taking, evaluating, acting on a credit application, or furnishing/maintaining credit information. In addition, persons involved in marketing and credit operations should receive appropriate instruction relative to their responsibilities."
However, while the formal guidance does not specify frequency of training, the AIRES Examination Questionnaire goes a step further to specify that training should occur at least annually.
Audits
Also according to NCUA's publication, The Fair Lending Guide, credit unions have the discretion whether to conduct an internal or external fair lending audit. However, an audit should be conducted at least annually to assess overall compliance. The FFIEC Examination Manual also provides guidance on identifying compliance program discrimination factors (p. 6), also advises examiners to review many aspects of fair lending compliance including audit programs. Generally, the guidance indicates that the annual audit should consider the credit union's compliance with the substantive nondiscrimination requirements as well as its adherence to the technical provisions of ECOA and Regulation B.
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These are only a few of the many complex issues that can come in the context of fair lending. To help credit unions comply with fair lending, below is a list of several key resources for assessing a lending program:
- NCUA Fair Lending Guide: NCUA's Office of Consumer Protection issued a Fair Lending Guide in December 2016. The guide gives a great overview of fair lending.
- NCUA Fair Lending FAQs
- NCUA Fair Lending Best Practices
- AIRES Exam Questionnaires
- FFIEC Fair Lending Examination Procedures: FFIEC issued interagency guidelines which provide additional insight into the objectives of a fair lending examination.
- NCUA Fair Lending Website: NCUA compiled several resources to help credit unions comply with the various laws and regulations that apply to fair lending.
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