By Maureen Yap, Special Counsel/Manager, Fair Lending Enforcement Section, Board of Governors of the Federal Reserve System
On October 17, 2012, the Federal Reserve Board (Federal Reserve), on behalf of the Non-Discrimination Working Group of the Financial Fraud Enforcement Task Force, conducted an Outlook Live webinar titled “Fair Lending Hot Topics.”1 Participants submitted a significant number of questions before and during the session. Because of time constraints, only a limited number of questions were answered during the webcast. This article addresses the questions most frequently asked during the webinar as well as other questions that we have recently received.
What efforts is the Federal Reserve undertaking to improve the efficiency of the fair lending examination process, particularly for community banks?
The Federal Reserve supervises approximately 800 state member banks, and fair lending is a critical component of the consumer compliance supervision process. We understand that many banks, particularly smaller banks, may find fair lending to be a challenging part of the examination. Some community banks have raised concerns about whether fair lending matters are evaluated consistently across the Federal Reserve System and have noted difficulty understanding the statistical analysis. We take these concerns seriously and have taken several steps to address them.
In 2009, in conjunction with the other federal banking agencies, the Federal Reserve revised the Interagency Fair Lending Examination Procedures (the Procedures) to provide more detailed information regarding current fair lending risk factors and to ensure that our examination procedures keep pace with industry changes. The Procedures are available to banks to aid in their analysis of fair lending risks and to prepare for fair lending examinations. Moreover, examiners work closely with the Board’s Fair Lending Enforcement Section when they find evidence of potential discrimination. This process ensures that fair lending laws and regulations are enforced consistently and rigorously throughout the Federal Reserve System.
In addition, we have increased our communications with banks during the examination process, particularly with respect to statistical reviews. We often conduct statistical analyses of the electronic data we obtain from banks to determine if there are any disparities in lending on a prohibited basis. We find that these reviews are very effective and more efficient for both banks and examiners. In most cases, our statistical analyses do not identify concerns. When we find problems, we take additional steps to communicate with the banks to ensure they understand the fair lending concerns raised by the analysis and how to respond effectively.
Finally, the Federal Reserve engages in a variety of outreach activities to ensure that banks of all sizes have access to information about the Federal Reserve’s approach to fair lending examinations. For example, this webinar had more than 5,000 registrants, most of whom were from community banks. The Fair Lending Enforcement staff meets regularly with consumer advocates, representatives of supervised institutions, and industry representatives to discuss fair lending matters and receive feedback. Through this outreach, the Federal Reserve addresses emerging fair lending issues and promotes sound fair lending compliance.
What is the difference between the fair lending supervisory authority of the Federal Reserve and the Consumer Financial Protection Bureau (CFPB)?
The Federal Reserve and the CFPB have different supervisory authority for the fair lending laws, depending on the asset size of the institution. Pursuant to provisions of the Dodd-Frank Act, effective July 21, 2011, the CFPB supervises state member banks with assets of more than $10 billion for compliance with the Equal Credit Opportunity Act (ECOA), while the Federal Reserve retains supervisory authority for those institutions for compliance with the Fair Housing Act (FHA). For state member banks with assets of $10 billion or less, the Federal Reserve retains the authority to enforce both the ECOA and the FHA.
The ECOA prohibits creditors from discriminating against any applicant, in any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age. In addition, creditors may not discriminate against an applicant because the applicant receives income from a public assistance program or has exercised, in good faith, any right under the Consumer Credit Protection Act. See 15 U.S.C. §1691(a). The FHA prohibits discrimination in residential real estate-related transactions, including the making and purchasing of mortgage loans, on the basis of race, color, religion, sex, handicap, familial status, or national origin. See 42 U.S.C. §3605(a).
What factors does the Federal Reserve consider in a redlining review?
Consistent with the Procedures, the Federal Reserve considers several risk factors in a redlining review, including:
For all of these factors, the Federal Reserve will take into account any changes based on the updated 2010 Census data.
In 2011, the U.S. Department of Justice (DOJ) settled two redlining cases based on referrals from the Federal Reserve: United States v. Citizens Republic Bancorp, Inc., and United States v. Midwest BankCentre. Both cases are available at www.justice.gov/crt/about/hce/caselist.php#lending.
How does the Federal Reserve evaluate a bank’s lending record during a redlining examination?
Generally, the Federal Reserve evaluates a bank’s HMDA data relative to similar lenders in the bank’s CRA assessment area or reasonably expected market area. More specifically, the Federal Reserve typically reviews whether there is a statistically significant disparity between a bank’s mortgage applications and originations in majority-minority census tracts compared with the adjusted aggregate of similar lenders. The “adjusted aggregate” is typically defined as lenders with lending activity that is between 50 and 200 percent of the bank’s volume and with a rate spread incidence of less than 25 percent, but it may be adjusted further based on the bank’s business model.
If available, the Federal Reserve also evaluates a bank’s CRA small business data. That is, the Federal Reserve typically reviews whether there is a statistically significant disparity between the bank’s small business loan originations in majority-minority census tracts compared with the adjusted aggregate. Here, the “adjusted aggregate” is typically defined as lenders with lending activity that is between 50 and 200 percent of the bank’s volume, but it may be adjusted further based on the bank’s business model.
Finally, the Federal Reserve may map the bank’s HMDA mortgage applications and originations and CRA small business originations to assess overall lending patterns and to determine whether the bank is failing to lend in certain geographies on a prohibited basis.
What factors does the Federal Reserve consider in a pricing review?
Consistent with the Procedures, the Federal Reserve considers several risk factors in a pricing review for mortgage and nonmortgage products, including:
Since 2009, the DOJ has settled four pricing cases based on referrals from the Federal Reserve: United States v. Nara Bank; United States v. PrimeLending; United States v. SunTrust Mortgage, Inc.; and United States v. Countrywide Financial Corp. These cases are available at www.justice.gov/crt/about/hce/caselist.php#lending.
Does the Federal Reserve evaluate indirect auto lending during a pricing review?
The CFPB recently released a bulletin providing guidance for its supervised entities. The bulletin discusses the fair lending requirements of the ECOA and its implementing regulation, Regulation B, for indirect auto lenders that permit dealers to increase consumer interest rates and that compensate dealers with a share of the increased interest revenues. This guidance applies to all indirect auto lenders within the jurisdiction of the CFPB, including both depository institutions and nonbank institutions. The bulletin is available at: tinyurl.com/cfpb-indirect-auto.
The CFPB’s bulletin is consistent with the Federal Reserve’s longstanding practice of including indirect auto lending within its pricing reviews of nonmortgage products. For example, in 2009, the DOJ settled a pricing case with an indirect auto lender based on a referral from the Federal Reserve: United States v. Nara Bank, which is available at www.justice.gov/crt/about/hce/caselist.php#lending.
For nonmortgage loans, what methods does the Federal Reserve use to determine the borrower’s race, ethnicity, and gender?
For mortgage loans, the Federal Reserve determines the borrower’s race, ethnicity, and gender based on the data collected pursuant to HMDA. For nonmortgage loans, the Federal Reserve may determine ethnicity and gender using the U.S. Census Bureau’s Spanish surname list and female first name list. For both mortgage and nonmortgage products, the Federal Reserve also uses census data to identify the majority-minority census tracts and to determine whether disparities exist between minority and nonminority areas.
What factors does the Federal Reserve consider in an underwriting review?
Consistent with the Procedures, the Federal Reserve considers several risk factors in an underwriting review for mortgage and nonmortgage products, including:
In 2011, the Federal Reserve referred an underwriting matter to the DOJ that involved discrimination on the basis of sex, in violation of the ECOA and the Fair Housing Act, and on the basis of familial status, in violation of the Fair Housing Act. The lender failed to consider a woman’s employment status and reasonably expected income while she was on unpaid maternity leave under the Family and Medical Leave Act.
Can a lender require an applicant receiving Social Security Disability Insurance (SSDI) income to submit a doctor’s letter to demonstrate the long-term stability of the income?
Investors generally require that underwriting be based on long-term, stable income, but lenders should ensure that they do not inadvertently impose higher standards on those receiving disability income. Recently, some lenders have required applicants receiving SSDI income to demonstrate income stability by submitting a doctor’s letter describing the nature of the disability and whether it is expected to continue for at least three years. These lenders do not require applicants who are not disabled to provide proof that their income will continue for at least three years. Moreover, Fannie Mae, Freddie Mac, and the U.S. Department of Housing and Urban Development’s (HUD’s) Federal Housing Administration (FHA) do not require a lender to request a doctor’s letter as evidence of stable income. (See Fannie Mae Single Family Selling Guide §B3-3.2-01 ; Freddie Mac Single Family Seller/Servicer Guide §37.13 ; HUD Mortgagee Letter 12-15 [Aug. 17, 2012]. )
A lender policy requiring a doctor’s letter to verify the stability of SSDI income may result in discrimination on the basis of disability in violation of the Fair Housing Act and discrimination on the basis of receipt of public assistance in violation of the ECOA. Two recent settlements by federal enforcement agencies highlight this fair lending risk:
Thus, lenders should review their policies regarding SSDI and other public assistance income to ensure that the policies comply with the Fair Housing Act and the ECOA.
What protections are available for lesbians, gays, bisexual, and transgender people (LGBT) seeking credit?
Recent actions by HUD have clarified and increased protections for LGBT individuals seeking mortgages. In 2010, HUD began recognizing that certain housing discrimination complaints from LGBT individuals are covered under the Fair Housing Act. HUD has stated that although the act does not specifically include sexual orientation and gender identity as prohibited bases, an LGBT person’s experience with sexual orientation or gender identity discrimination may be covered by the Fair Housing Act. For example, a property manager refusing to rent to an individual who does not conform to gender stereotypes may constitute discrimination on the basis of sex under the Fair Housing Act. Additional examples are available at: tinyurl.com/hud-lgbt-page.
In 2012, HUD issued a final rule applicable to HUD programs, including FHA loans. The rule contains several provisions, including one requiring that eligibility for FHA loans be determined without regard to the applicant’s actual or perceived sexual orientation, gender identity, or marital status. The rule is available at: tinyurl.com/hud-rule-lgbt. This year, HUD entered into a settlement agreement with Bank of America regarding this rule. HUD alleged that the bank denied a loan to a couple seeking to obtain an FHA-insured mortgage because of their sexual orientation and marital status. More information about the agreement is available at: tinyurl.com/hud-LGBT-pr .
In addition to these federal actions, several states and localities provide protections for LGBT individuals. Lenders should review their policies and practices to ensure that they comply with federal, state, and local fair lending laws and regulations.
What are the fair lending considerations associated with banks owning other real estate owned (OREO) properties?
In light of recent economic conditions, some banking organizations may choose to make greater use of rental activities in their disposition strategies than in the past. On April 5, 2012, the Federal Reserve released a policy statement about the rental of OREO properties, which is applicable to state member banks, bank holding companies, nonbank subsidiaries of bank holding companies, savings and loan holding companies, nonthrift subsidiaries of savings and loan holding companies, and U.S. branches and agencies of foreign banking organizations (collectively, banking organizations). The policy statement reminds banking organizations that the Federal Reserve’s regulations and policies permit the rental of OREO properties to third-party tenants as part of an orderly disposition strategy within statutory and regulatory limits. The policy statement is available at www.federalreserve.gov/newsevents/press/bcreg/20120405a.htm.
On June 28, 2012, the Federal Reserve provided further guidance on OREO properties by releasing Questions and Answers for Federal Reserve-Regulated Institutions Related to the Management of Other Real Estate Owned. This guidance is intended to clarify existing policies and promote prudent practices for the management of OREO properties. With respect to fair housing compliance, the guidance noted potential risks in the rental, repairs, marketing, and sales of properties. For example, an institution should have a plan for the marketing and sale of the property in accordance with applicable federal and state laws, including the Fair Housing Act. We note that at least one consumer advocate group has filed complaints with HUD alleging that certain banks have violated the Fair Housing Act by varying their marketing and maintenance of OREO properties on a prohibited basis. Thus, banking organizations with OREO properties should review their policies and procedures to ensure that they comply with federal and state fair housing laws and regulations.
What are some resources that banks can use to learn more about fair lending compliance?
In addition to this publication, the Federal Reserve provides several resources for financial institutions to learn about consumer compliance, including fair lending compliance. These resources include:
Finally, the 2009 Interagency Fair Lending Examination Procedures and Appendix are available at www.ffiec.gov/PDF/fairlend.
Complete Issue (2.41 MB, 24 pages)
Kenneth Benton, Editor
FEDERAL RESERVE SYSTEM
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