Fair lending climbs up
the regulators’ list of concerns and mortgage loans are
scrutinized like never before. Combine this market reality with the many
changes in Reg. Z and RESPA, and even more
coming as a result of Dodd-Frank, and consumer
mortgage lending is an increasingly expensive proposition for many banks.
Reputation risk increased. Combining regulatory scrutiny with public attention to the issue means the risk of adverse
headlines and even publicized enforcement actions increases
dramatically. As a result of this, many banks made the decision
to … get out of the indirect lending business. It’s a vicious cycle.
(CFPB) finalizes the appropriate changes to Reg. C. One of these
new elements is the channel through which the application was
received; thus, whether an application was received through a
broker or to the bank directly will be publicly available information and subject to analysis.
Additionally, the SAFE Act unique identifier will also be
reported on the loan application register (LAR), giving both
regulators and the public new and very specific information to
determine whether third-party involvement has an adverse impact
on a bank’s mortgage loans.
Therefore, knowing your mortgage brokers and being able
to rely on the data they collect on the bank’s behalf is more
important than ever.
Fair lending concerns: Within the past year or so the agencies have issued updated fair lending exam procedures, with added
sections on broker activity and redlining, among other things.
In a well-publicized case earlier in 2010, the Department of
Justice (DOJ) found that AIG Federal Savings Bank participated
in discriminatory behavior by booking loans received through
mortgage brokers where the broker fees charged to African-American applicants were higher than those charged to white
applicants. Although AIG did not charge the fees directly, it was
found to have allowed mortgage brokers to charge them. This
case is significant in that it appears to make a wholesale lender
responsible for the actions of brokers it uses.
According to the DOJ’s complaint, AIG identified, approved,
and monitored the brokers. This would indicate that up-front due
diligence of mortgage brokers and in-depth and effective monitoring programs are the keys to a trouble-free wholesale operation.
With the mortgage market continuing to be a challenge and with
more regulations either on the books or in the pipeline, what
does that mean for an institution wishing to continue to serve its
community’s mortgage needs? What are the regulatory issues to
be aware of when dealing with mortgage partners, both now and
in the future? The following list includes current and proposed
1. More Attention Paid to third Parties in
hMDA and Fair Lending exams
HmdA and sAFE Act data collection: HMDA and fair
lending exams have been becoming stricter over the last few years,
with requests from the agencies to submit additional information
going above and beyond that required by the regulation. So-called
“HMDA-plus” data is used by the agencies to conduct additional
statistical testing of the bank’s lending practices.
The debate over whether HMDA-plus data should be part of
the exam process has been rendered moot by Dodd-Frank. Section
1094 adds significant new data elements that must eventually
be submitted once the Consumer Financial Protection Bureau
2. More referrals to the Department of Justice
Due to this attention and pressure from both the public and
Congress, the regulatory agencies are expected to refer more fair
lending cases to the DOJ. It will be no surprise if many of these
cases deal with loans coming from brokers, with attention given
to how the broker was compensated.
Earlier this year, the DOJ announced that it was creating a new
fair lending unit within the Civil Rights Division’s Housing and
Civil Enforcement Section. This unit will be dedicated to a new
emphasis on fair lending enforcement, and it apparently means
business—its chief, Tomas Perez, drew parallels between lending
discrimination and cross-burning and other hate crimes. The
new unit will investigate instances of traditional discrimination
(underwriting and pricing differences according to race or national origin), redlining, and reverse redlining, activities that often
involve brokers. It will also spend significant time investigating
servicing practices, to see whether distressed minority borrowers receive less-favorable treatment when seeking modifications
or refinancings than do nonminority borrowers. Perez also has
stated that this effort will be a multifaceted approach, along with
state attorneys general.
The key is to make sure your bank’s fair lending efforts are