Fair Lending and Exceptions to Policy

Issue/Question

The Bank has an active construction loan to a borrower who recently died.  His son is his only heir and has qualified as the administrator of the estate.  He wants to transfer the deed and finish the home.  He applied for a loan, as the Bank was not willing to have him assume the existing loan, and qualifies. The Bank would like to waive the origination and construction inspection fee since the father paid all of those costs when the loan originated.  Is this a fair lending violation if the Bank waives these fees?  If it can be done, how should the Bank document the file to make the circumstances clear and show this is not a standard practice?

Response Summary

Nothing in the Fair Lending prevents the Bank from granting an exception to policy, provided that the decision is not made on a prohibited basis or has that effect. The Bank should prepare a memorandum to file providing the reasons in justification of its decision. It should also begin developing a policy which establishes formal standards for granting exceptions to policy, including consideration of safety and soundness and Fair Lending requirements, documenting such exceptions, and tracking them in order to identify any patterns to the exceptions which indicate equal or different treatment in the terms and conditions of loans or the quality of assistance offered to applicants.

Response Detail

With regards this particular situation, there is nothing on the face of it which indicates that the Bank is approving an exception to policy on a prohibited basis.

For Fair Lending purposes, 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 [12 CFR §1002.2(z)].

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 by 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].
In this case, the Bank should document the reasons for its decision, as with a memorandum to file, which would do the following:

• State the facts of the matter
• Indicate why the applicant is considered to be credit worthy
• Describe the policy in question
• Demonstrate the manner in which an exception to policy will facilitate the transaction
• Provide the justification for making such a business decision
• Indicate the effect of the policy exception on the safety and soundness of the Bank
• Indicate whether the decision would result in discrimination on a prohibited basis or would have that effect

Exceptions to policy are commonly made by banks as part of the business of banking. Nothing in the Equal Credit Opportunity Act, Regulation B, which gives it effect, or the Fair Housing Act prohibits them from doing do. The problem arises when such exceptions are granted as a matter of discretion. The general rule is that the greater the degree of discretion, the greater the risk to the bank, from a Fair Lending standpoint.

Exceptions invite greater scrutiny from the Federal regulators. If there are different outcomes for similarly situated applicants, it may indicate that a bank’s practices have a disparate effect on protected groups.

What the Bank should have, then, is a policy which establishes formal standards for granting exceptions to policy, including consideration of safety and soundness and Fair Lending requirements, documenting such exceptions, and tracking them in order to identify any patterns to the exceptions which indicate equal or different treatment in the terms and conditions of loans or the quality of assistance offered to applicants [FDIC, Side by Side: A Guide to Fair Lending].

The Bank should go forward in this instance with the appropriate documentation in support of the policy exception. It should also begin developing an exception policy, if it does not already have one.

This entry was posted on Monday, February 23rd, 2015 at 12:29 pm.