ABA Bank Compliance - May/June 2013

Legislators and regulators have clearly raised expectations for fair lending programs and efforts.

This leads to a related question: After Dodd-Frank, who is responsible for fair lending oversight, anyway?

who’s on First?

Dodd-Frank gave CFPB oversight for Regulations B (ECOA) and C (HMDA), but not CRA and the Fair Housing Act (FHA). A bank’s prudential regulator remains responsible for FHA compliance oversight (even though that regulation remains under HUD’s authority). The result is there are more agencies with their hands in the fair lending pot than ever before.

For banks with assets under $10 billion there isn’t much change. The examiners are the same regardless of who has the responsibility of drafting any particular regulation. ECOA and HMDA going to the CFPB doesn’t have much of an impact. But for banks now subject to CFPB supervision, there are multiple fair lending exams: the CFPB can and does examine fair lending when evaluating compliance with Reg. B and HMDA, and the bank’s prudential regulator can examine fair lending during a CRA exam and when evaluating FHA compliance. The result is exam scope overlap, especially when it comes to residential mortgage loans.

Since no agency is “taking the lead,” there isn’t really any solution for this. But different standards and expectations are a real possibility. The hope is that over time, these issues will be harmonized or otherwise ironed out.

interplay with udaaP

Much has been written and said about UDAAP (or UDAP; the number of ‘A’s doesn’t matter here) lately, and it truly is the new measuring stick against which everything in the consumer compliance world is evaluated. It is easy to see where UDAAP and fair lending intersect since they have much in common: both are concepts that deal with bad treatment. Discrimination is against the law when protected class customers are treated less favorably than non-protected class customers (without a valid business justification and so on). UDAAP is a problem when customers are treated in an unfair or deceptive manner or abused in some way. It doesn’t matter who they are.

Both UDAAP and fair lending have subjective elements, and compliance professionals have to manage them in similar ways. The UDAAP provisions in Dodd-Frank (we don’t have UDAAP regulations, and we won’t) don’t identify any “protected classes;” they cover all consumers. But there are groups of what may be called “vulnerable” customers who may be more susceptible to UDAAP.

The following are examples of what could be considered vulnerable classes of:

■ ■ the elderly

■ ■ non-English speaking consumers or those for whom English is not their primary language.

■ ■ members of the military

■ ■ unemployed consumers

■ ■ consumers with lower education levels

■ ■ consumers suffering from financial distress
There are others, but you get the point. These are consumers
who are at greater risk of being taken advantage of, mistreated,
or deceived.

disparate impact (re)-emphasized Fair lending officers have been dealing with disparate impact for years now, so it’s not a new concept. What is new is increased emphasis on utilizing disparate impact when examining fair lending issues, especially outside the mortgage environment. At its heart, disparate impact is a data-driven approach. It may also be partially due to the fact that the availability of the disparate impact theory itself is under attack in the courts, and it will likely need to be settled one way or the other by the U.S. Supreme Court. But we’re not there yet.

FHA disparate impact rule. On February 8, 2013, HUD issued a final rule to cement the viability of the disparate impact theory into the Fair Housing Act regulation. It contains a three-part test:

1. The agency must first show that a policy or practice of the bank, although facially neutral, “results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic.” Evidence of intent isn’t necessary for a disparate impact claim to be lodged. The numbers (data-driven approach) are often all it takes.

2. The lender then has the burden to show that the policy or practice “is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests[;]… a legally sufficient justification must be supported by evidence and may not be hypothetical or speculative.” Unfortunately, there is not much guidance as to how this burden may be met.

3. Even if the lender is able to satisfy this burden, the agency “may still establish liability by proving that the … interest could be served by a practice that has a less discriminatory effect.”