Fair Lending Overview
In this Compliance Clip, Adam provides an overview of fair lending.
Video Transcript
The following is a transcript of this video.
My name is Adam Witmer and I'm your host here at compliancecohort.com.
We're actually starting a series on fair lending and today's topic is conducting an overview of fair lending. Fair Lending is currently a hot topic with examiners. I believe it has always been a hot topic. It's a topic and it always will be a hot topic. That's just the reality of fair lending.
The problem with fair lending in today's economy is that fair lending scrutiny with examiners is only going to increase. It's going to increase for a couple of reasons. First of all, the new HMDA requirements that provide more data fields to examiners to conduct a fair lending review are increasing. That took place on January 1, 2018. Secondly, under the Dodd-Frank Act, there's going to be more data that financial institutions are going to report. This will be small business data that we have to report. Those rules are still yet to be determined. So the idea is examiner scrutiny is only going to increase, and this means that now is the time for your organization to make sure you know what you're supposed to do when it comes to fair lending.
As far as fair lending overview, let's talk about what fair lending is. The bottom line with fair lending is that you're supposed to lend fairly, lend equally to all applicants. The bottom line is you cannot discriminate against a protected class applicant. When it comes to protected classes, there are two laws that govern fair lending and define protected classes. The first law is the Equal Credit Opportunity Act, which is implemented by Regulation B. The second law is the Fair Housing Act. So those are our two laws.
It's interesting because each of these laws define a protected class slightly differently. Under the Equal Credit Opportunity Act and Regulation B, they define a protected class as race or color, religion, national origin, sex, marital status, age, income from public assistance, or when somebody exercises their rights in good faith under the Consumer Credit Protection Act. So, these are the protected classes under Regulation B. Under the Fair Housing Act, on the other hand, they're very similar when it comes to the first several, but there's two new ones which include familial status which is defined as the number of children under 18 years of age that are living at home, and handicap. So two additional protected classes. The bottom line is that we have to treat all of these protected classes equally when it comes to lending and if we discriminate against one of these, that's where we have fair lending issues.
One of the things we need to understand when it comes to fair lending is what our examiner expectations are for us. So if we're evaluating our fair lending posture, one of the things that's good to do is to know what the examiners are going to look at when they come in. When the examiners come in, they're going to be looking for three things because the courts have defined three types of discrimination. The first type of discrimination is what we call overt evidence of disparate treatment. I call these stupid comments. When you have a lender that says, “I won't lend to you because you're too old,” well, that's a stupid comment and that is overt evidence of disparate treatment. The second type of discrimination recognized by the courts is comparative evidence of disparate treatment. Comparative evidence is when examiners compare the loans that you have done and they find that there is one loan to a protected class that was denied, where a similar loan, a very, very similar loan to a control group, probably a white male, was approved. That would be comparative evidence of disparate treatment. Finally, the third type of discrimination recognized by the courts is disparate impact. Disparate impact almost always comes from a policy. The policy may initially not appear to discriminate, but has the result, the impact and effect of discriminating against a protected class.
Now each of these types of discrimination, I'm going to have a separate video breaking down each of these types, in fact three different videos. So make sure to look for those here at compliancecohort.com.
Now, since fair lending is a hot topic, there are a couple of things that you can do as an organization to reduce your risk of discrimination. The first thing you can do is to assess your risk and conduct a fair lending risk assessment. This is a new hot topic with examiners. They want financial institutions to conduct fair lending risk assessment. The large banks and credit unions have done this for years, but for community banks and credit unions this is something new for them. So the first thing is to assess risk. The second thing is to conduct training. To tell your lenders what they can do and what they can't do. Training is an essential element of mitigating risk for fair lending. And finally, the third thing you can do is to tighten your policy controls with the bottom line being to reduce the amount of discretion that your lending staff have because lending discretion almost always results in fair lending issues.
That is our overview of fair lending. I hope you enjoyed this video.