ABA Bank Compliance - May/June 2013

hood of an individual being a particular race, ethnicity, or gender based on the person’s first and last names. Similarly, if a person lives in a predominantly minority census tract, a lender could make certain assumptions about that person’s minority status.

Statistically, these assumptions become more reliable as data populations grow larger (as the number of loans grows larger, it becomes more likely the percentage of minority borrowers in the dataset will approximate the minority makeup of the area’s population as a whole). But it’s not a perfect science. Errors are unavoidable whenever assumptions are made about race, ethnicity, or gender based on a person’s name or where they live. In the end, it’s an educated guess, but still a way to begin to see if there could be potential for exposure.

Nevertheless, regulatory agencies are using proxy methodology to conduct analyses of loan types where GMI is not available. We’ve all heard the CFPB is a “ data-driven” agency and will use statistics and information in a big way. So, the use of proxy data is not going away.

Cradle-to-grave evaluation. Fair lending is no longer just about the do-we-make-the-loan-or-not decision or how to price loans (more on that later, though). Lenders must be conscious of the consequences of all their decisions throughout the entire lifecycle of a loan and how those decisions affect both individuals and the bank’s entire market area.

For example, think of the fair lending implications (and whether fair lending is even considered) in these decisions:

■ ■ How are loan products and features developed? ■ ■ Who are your intended or targeted borrowers?

■ ■ Where, how, and to whom are loan products marketed?

■ ■ How are prescreening and qualification criteria developed? Are there viable financial bases for thresholds, limits, and guidelines?

■ ■ How are loan officers compensated?

■ ■ Are ancillary products (debt cancellation, identity theft prevention, etc.) offered and, if so, how and to whom?

■ ■ What is the bank’s definition of an “application” (versus prequalification, preapproval, and so forth), when are applications accepted, and is this consistently applied?

■ ■ When looking at pricing differences, do you consider only the interest rate or do you also look at fees (think of the all-in APR approach)?

■ ■ How do you apply servicing practices?

■ ■ How are loss mitigation and foreclosure prevention efforts designed and offered, and to whom are they provided? Are they ad-hoc or consistent?

You should answer each of these questions with a focus on whether your process could result in a disproportionate negative impact on members of a protected class.

CRA impact. A bank’s CRA (Community Reinvestment Act) rating can be downgraded if its regulator finds fair lending problems occurring during the same time period as its CRA evaluation. This has always been the case, but CRA was not originally designed to be a fair lending rule; its purpose is to ensure banks fulfill their obligations to help meet the credit needs of the communities in which they are chartered. But meeting those needs in a nondiscriminatory manner is certainly part of that expectation.

Expect examiners from the Office of the Comptroller of the Currency (OCC), Federal Reserve, and The Federal Deposit Insurance Corporation (FDIC) (the CFPB does not have oversight of CRA) to carefully look at fair lending issues when evaluating a bank’s CRA performance. After all, if a bank is engaging in discriminatory lending practices, it’s not a stretch to say it’s not meeting its obligations to help meet the credit needs of its market and customers.