Are there Fair Lending issues when a bank offers terms other than what were applied for?

Inquiry/Issue

Customer has applied for a mortgage loan with a 10 year term that would be an HPML. As a matter of policy, the Bank does not make HPMLs. Would there be a Fair Lending issue if the Bank either offered its standard 25 year product or waived fees, in order to make the loan a non-HPML?

Response Summary

The actions contemplated by the Bank appear neutral on their face and are not specifically prohibited by the Equal Credit Opportunity Act (“ECOA”), as given expression by Regulation B, or the Fair Housing Act. Nothing in the regulation or law requires a bank to offer particular loan products, while banks have been waiving terms and conditions of loans for as long as there have been banks.

If there is a question concerning them from a fair lending standpoint, however, it would be with regards the effect of such actions on groups protected by fair lending laws and regulations. In addressing this issue, The Bank should document the issue and the manner in which it is being resolved, and indicate that its decision is based upon the appropriate underwriting criteria and does not involve discrimination on a prohibited basis. Going forward, if it does not already do so, the Bank should exercise oversight over variations in terms normally offered to the public or the establishment of loan products, to be sure that there is no overt discrimination on a prohibited basis or a disparate negative effect on protected groups.

Response Detail

The Bank in this case is evaluating an application for a type of mortgage loan it does not offer—that is, a Higher Priced Mortgage Loan (“HPML”)—and considering whether to offer a similar loan that would not be an HPML or to waive certain conditions that would take the loan applied for out of the HPML category.

The actions contemplated by the Bank appear neutral on their face and are not specifically prohibited by the Equal Credit Opportunity Act (“ECOA”), as given expression by Regulation B,or the Fair Housing Act. Nothing in the regulation or law requires a bank to offer particular loan products, while banks have been waiving terms and conditions of loans for as long as there have been banks.

If there is a question concerning them from a fair lending standpoint, however, it would be with regards the effect of such actions on groups protected by fair lending laws and regulations.

At a teleconference a few years ago, at the height of the financial crisis, the FDIC responded to question concerning the treatment of financial institutions which had decreased loan production with this statement:

Examiners recognize that the economic climate has caused many institutions to decrease their lending or number of loan products. This is not a fair lending concern on its face, provided that the loans the institution does make are made in a manner that does treat members of protected classes differently or made them under policies that have a disparate impact on protected classes. FDIC Teleconference on Fair Lending Issues (November10, 2010).

Regulation B covers all dealings between an applicant and a creditor, whether or not addressed by specific provision. Official Interpretations, 1005.4(a)-1. In making a determination of whether or not there is discrimination on a prohibited basis, the regulators will look not only to overt discrimination, but also to acts or practices which appear to be neutral on their face but have a disproportionately negative effect on protected groups. They will consider whether there is a legitimate business need involved that could not be satisfied as well by means that are less disparate in their effect. Regulation B, Official Interpretations, 1002.6(a)-2.

The Interagency Task on Fair Lending generally applies this standard to all lending acts or practices. It is concerned with such aspects as “disparate treatment analysis” and “disparate impact analysis,” in which bank policies and procedures, though neutral on their face, nevertheless result in members of some groups being treated more or less favorably on a prohibited basis. 59Fed. 18,266(April 15, 1994); Chicago Federal Reserve, Banker’s Guide to Risk Based Fair Lending.

The FDIC has recommended techniques for comparing loan applications to determine whether the reasons for the denial of an application are consistent with an institution’s lending policies and practices and whether policies and practices are consistently applied without regard to any prohibited basis. FDIC, Side by Side: A Guide to Fair Lending, Comparing the Files. Similarly, a bank should look to variations in the application of lending policies and practices, to determine whether there is a disparate effect.

Does this mean that not offering an HPML or waiving terms and conditions is necessarily prohibited by the ECOA or Fair Housing Act? Not at all. What it does mean, however, is that such a practice should not be done on an ad hoc basis, where loan office or others, acting with the best of intentions, may create a pattern which in the eyes of a federal regulator has a discriminatory effect. Rather, such a practice should be established within a formal policy, apart from the particular matter, which forbids discrimination on a prohibited basis, provides for oversight and monitoring, and which also indicates the business purpose to be achieved and the criteria for such waivers.

The actions contemplated by the Bank in this case are relatively innocuous. It should document the issue—that is, not making HPMLs as a matter of policy—the manner in which it is being resolved, and indicate that its decision is based upon the appropriate underwriting criteria and does not involve discrimination on a prohibited basis. Going forward, if it does not already do so, the Bank should exercise oversight over variations in terms normally offered to the public or the establishment of loan products, to be sure that there is no overt discrimination on a prohibited basis or a disparate negative effect on protected groups.

This entry was posted on Friday, September 12th, 2014 at 3:25 pm.