Mortgage Loan Program Only for Certain Areas

ISSUE/QUESTION

The Bank wishes to limit a special mortgage loan promotion to three counties and asks whether fair lending issues may be raised.

RESPONSE SUMMARY

There is nothing in the Fair Housing Act or the Equal Credit Opportunity Act (“ECOA”), as implemented by Regulation B, which would prohibit making loans at a special rate of interest if the loans are secured by properties located in particular areas. Different lending or marketing based on geography will invite federal scrutiny, however. The Bank must be able to demonstrate that the geographic limitation does not have a disparate effect on protected groups. The structure of the loans being offered in this case mitigate against that possibility, in that the minimum amount is relatively low and there is no restriction of geographies within the counties. However, the loans will in effect be offered only to applicants who are presently residents of those counties. For that reason, the Bank must compare the demographics of the counties where the promotion is being offered with those of adjacent counties or its marketing or assessment area as a whole. What the Bank should want to be able to do in this matter is to demonstrate that, in offering such a promotion or structuring it as it did, it took into consideration ECOA and Fair Lending requirements and found that the promotion was in compliance with them.

RESPONSE DETAIL

Introduction

There is nothing in the Fair Housing Act or the Equal Credit Opportunity Act (“ECOA”), as implemented by Regulation B, which would prohibit making loans at a special rate of interest if the loans are secured by properties located in particular areas. Different lending or marketing based on geography will invite federal scrutiny, however. While a promotion may not overtly discriminate against applicants on a prohibited basis, however, a financial institution would also have to consider whether it would have a disparate negative effect on protected groups.

In this case, there is no provision of the promotion which overtly discriminates against applicants on a prohibited basis. What the Bank should want to be able to do, then, is to demonstrate that, in offering such a promotion and structuring it as it did, it took into consideration the requirements of the Fair Housing Act and the ECOA, including whether its effect upon applicants amounted to discrimination on a prohibited basis.

Promotional Rate for Mortgage Loans Limited to Certain Areas

As indicated by the FFIEC Interagency Fair Lending Procedures, the federal regulatory agencies are sensitive to “redlining.” The term is not used anywhere in the Fair Housing Act or ECOA, but the federal courts and the agencies responsible for enforcing the fair lending laws and regulations have interpreted it as prohibiting financial institutions from having different marketing or lending practices for certain geographic areas, compared to others. A promotion limited to residents of one area could invite increased scrutiny from a federal examiner.

A “prohibited basis” means race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to enter into a binding contract), the fact that all or part of the applicant’s income derives from any public assistance program, or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Bureau of Consumer Financial Protection (“CFPB”) [12 CFR §1002.2(z)].

Title VIII of the Civil Rights Act of 1968 (i.e., the Fair Housing Act), is similar in that it prohibits discrimination in the sale, rental, and financing of dwellings (and in other housing-related transactions) based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and disability.

To discriminate against an applicant means to treat one applicant less favorably than another [12 CFR §1002.2(n)]. The general rule covers all dealings without exception between an applicant and a creditor, including the terms of the credit. Whether or not prohibited elsewhere in the regulation, a credit practice that treats applicants differently on a prohibited basis violates the law because it violates the general rule [Official Interpretations, ¶1002.4(a)-1]. Thus, a preferential rate of interest may violate fair lending rules if one applicant is treated less favorably than another applicant on a prohibited basis.

In enforcing this prohibition, federal regulators have looked not merely at discrimination, but also at any act or practice which has a disparate negative effect on protected groups.

The question for the Bank concerning this promotion is whether making loans at a more favorable rate for loans secured by properties in certain designated counties has the effect of treating applicants differently on a prohibited basis. The more favorable rate for such loans necessarily means that applicants applying for loans secured by properties located elsewhere will be treated less favorably.  Since the promotion does not consider factors which are prohibited, but only where the properties securing the loans are located, it would be in violation of Fair Housing or ECOA requirements only if it limiting it to certain areas had a negative disparate effect on protected groups.

Factors indicating that the promotion does not have disparate negative effect on protected groups include:

• The low minimum amount and moderate amount of the loans being offered, which would mitigate any differences between racial or ethnic groups that might be reflected in differences in income or creditworthiness.
• While the promotion is limited to certain counties, it is not limited to particular geographies within the counties, and thus does not exclude low-or-moderate income geographies within the counties.

If the Bank could demonstrate that the promotion would enhance its lending performance within its CRA assessment area, this too would be a mitigating factor.

It would also be useful if the Bank could indicate what competing financial institutions are offering in the counties covered by the promotion, if the promotion was intended to match them.

Had purchase mortgage loans been available through the promotion, this would have been a mitigating factor as well, since it would have allowed applicants from outside the area of the promotion to take advantage of it.

The promotion excludes purchase money loans, however, so that it is, in effect, limited to applicants who are already residents of the counties where it is being offered. In that respect, the Bank should consider whether the demographics of the counties subject to the promotion are dissimilar from adjacent counties, or to those of the Bank’s market or assessment area as a whole. If it could be shown that there is no such dissimilarity, it would mitigate against the possibility of the promotion having a disparate negative effect on protected groups.  On the other hand, if the demographics for the adjacent counties or the Bank’s marketing or assessment area as a whole showed more low-to-moderate income geographies than in the areas subject to the promotion, or a greater proportion of groups protected by the fair lending laws and regulations, then there would be a greater likelihood of a disparate negative effect and of scrutiny by a federal regulator.

As noted in this discussion, some factors are apparent, as in the lack of overt discrimination on a prohibited basis or the mitigating aspects of certain aspects of the promotion. Other matters are questions of fact which much be answered by the Bank. In making a determination of whether the promotion is in compliance with fair lending laws and regulations, on the basis of this information, the Bank should document its reasons and the factors it considered, and keep such documentation available for as long as such a question might be posed by a federal regulator.

This entry was posted on Friday, January 23rd, 2015 at 7:00 pm.