Community banks need to develop and follow fair lending practices; providing customers with nondiscriminatory access to credit is, of course, the right thing to do. What’s more, violations of fair lending laws and regulations can result in costly litigation and enforcement actions, hefty monetary penalties and serious reputational damage.
What are the laws?
The two primary fair lending laws are the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). The FHA prohibits discrimination in residential real estate-related transactions based on race or color, national origin, religion, sex, familial status (for example, households with one or more children under 18, pregnant women, or people in the process of adopting or otherwise gaining custody of a child), or handicap.
Similarly, the ECOA prohibits discrimination in credit transactions based on race or color, national origin, religion, sex, marital status, age (assuming the applicant has the capacity to contract), an applicant’s receipt of income from a public assistance program, or an applicant’s good faith exercise of his or her rights under the Consumer Credit Protection Act.
The Home Mortgage Disclosure Act (HMDA) requires certain lenders to report information about mortgage loan activity, including the race, ethnicity and sex of applicants. Finally, the Community Reinvestment Act (CRA) provides incentives for banks to help meet their communities’ credit needs.
How can you comply?
Here are five tips for developing an effective compliance program:
Second, lending discrimination isn’t limited to disparate treatment of protected classes. Banks are potentially liable under the FHA and ECOA if their lending practices have a disparate impact on protected classes. For example, a policy of not making single-family mortgage loans under a specified dollar amount may disproportionately exclude certain low-income groups, even though the policy applies equally to all loan applicants. Banks can defend themselves against allegations of discrimination based on disparate impact by showing that the policy was justified by business necessity and that there was no alternative practice for achieving the same business objective without a disparate impact.
Reduce your risk
Fair lending laws are complex, and guidance can sometimes be ambiguous. Although a full discussion of the subject is beyond the scope of this article, the five tips outlined here are a good start in helping you evaluate the effectiveness of your fair lending compliance program.
Sidebar: Discrimination risk factors
A useful source of guidance on fair lending compliance is the Interagency Fair Lending Examination Procedures used by federal financial agencies. Among other things, the guidelines list the following compliance program discrimination risk factors:
If any of these problems are present in your institution, it’s important to rectify them as soon as possible. That way, you’ll avoid penalties and at the same time contribute to fair lending practices.