What, pray tell, is all of this noise about fair lending? Haven’t banks always been fair in their lending practices and haven’t they been responsible about it, to boot? I don’t think so you respond! I know my alphabet better than that and iIf this were true, we wouldn’t be seeing all of the regulations that have been and continue to be put in place to assure fair and responsible lending practices. Like a good parent who teaches their child how to behave, these regulations are in place to help banks and their clients assure that these behavior principles are properly followed every step of the way. And just like a good parent will scold their child when s/he isn’t nice, in the business world, failure to lend in a fair and responsible manner can result in pretty heavy fines and penalties. As a matter of fact, the more often a financial institution “behaves” improperly, the harsher the punishment and the deeper the pain. I don’t know about you but somehow I sense you’d rather avoid pain too.
When I was growing up, my parents told me that I did not come with a book of instructions when I was born so they had to sort of “wing” it along the way. In somewhat the same manner, the regulations that now govern fair lending have come about in a piecemeal fashion over the years, somewhat as a response to crises or as a result of observed errors and improper practices by banks which resulted in many consumer complaints. All of the laws that were put in place at some point in the past continue to be modified and this will go on. I mean, look at it: it’s an alphabet soup of regulations out there that govern the concept of fair lending. So today’s lesson is to go through a very small portion of that alphabet.
FHA and ECOA represent, by far, the most well-known regulations that govern fair lending. To those, we can add several others CRA, FCRA, HMDA, TILA, etc…which amplify the regulatory guidance. Taken singly, each of these regulations addresses specific aspects of fair lending. Taken as a whole, they establish the framework within which financial institutions should operate and that customers should expect.
Let’s take a high level look at some of the major regulations to understand their broad purpose.
FHA or Fair Housing Act goes back to 1968. As its name implies, its purpose is to bar discrimination in housing transactions, be they purchases, rental or even advertising about such transactions. The criteria that a financial institution may not use in housing transactions are: handicap, family status, race, religion, color, gender and national origin. That’s a total of seven prohibited bases. We’ve all seen these items before and are familiar with them. This list was enhanced with ECOA in 1974.
ECOA or Equal Credit Opportunity Act of 1974. This rule, also known as Reg. B, applies to both retail and commercial credits. Its purpose is to ensure that banks provide equal access to loans to all credit-worthy applicants: it prohibits lenders from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied. With ECOA there are nine lending bases that are prohibited in a decision to extend a loan. They are: race, color, religion, national origin, gender, age, marital status, applicant’s receipt of public assistance income and the applicant’s exercise of any right under the Consumer Credit Protection Act.
Various state and local laws – FHA and ECOA are not the only rules that prohibit usage of certain consideration when a bank assesses whether it should extend a loan. You need also consider that certain states have enacted requirements that are stricter than federal rules. Some of the additional considerations include: sexual orientation or gender identity, ancestral tree, military status, etc.
TILA or Truth in Lending Act of 1968 is also known as Reg. Z. Its objective is to promote the informed use of consumer credit by requiring that adequate disclosures are made to the consumers, In addition, it provides consumers the right to cancel certain credit transactions. TILA requires lenders to divulge the annual percentage rate, or APR, and any finance charges to the consumer before entering into a binding agreement with the financial institution, and. In addition, the methods for resolving errors on certain types of credit accounts.
FACT Act, or Fair and Accurate Credit Transactions Act, was passed in 2003 and updates the Fair Credit Report Act or FCRA originally passed in 1996. While the FACT Act was passed in 2003, its provisions have been implemented in subsequent years. Together, these acts relate to banks that obtain and use information about consumers to determine the consumer’s eligibility for products, services or employment, and how and with whom they may share that information. The Fair Credit Reporting Act also impacts Reg. V which implements the notice and opt-out provisions of the Fair Credit Reporting Act applicable to financial institutions that give their affiliates certain information about consumers.
FTC Act or Fair Trade Commission Act. This rule is often referred to as Reg. AA and UDAP which stands for Unfair or Deceptive Acts or Practices. Section 5 of the Act makes unfair and deceptive acts and practices illegal. This basically includes any practices that can, directly or indirectly, mislead consumers or cause substantial harm to them. Do recall as well that the Dodd Frank Act and the Consumer Protection Act also bar unfair, deceptive or abusive practices.
HMDA or Home Mortgage Disclosure Act. This is also known as Reg. C. This rule was passed in 1975. It directs financial institutions to capture and report information on applications to acquire, improve or refinance dwellings. The data thus captured and reported by financial institutions helps regulatory agencies determine whether the lenders are complying with anti-discrimination laws (for example: FHA, ECOA).
CRA or Community Reinvestment Act. This was enacted back in 1997 and it is often called Reg. BB. Its overarching objective is to guide and encourage banks to meet the lending needs of the communities in which they operate. If a bank’s market includes low and moderate income areas yet the bank does not lend to these areas or seeks to lend to them in a way that reduces the likelihood that loans to these areas will in fact be made, well, “Houston, we have a problem.” Regulators are active in examining banks regarding their CRA practices and they make the results of their examinations public. Customers can easily go online to check matters with regulators, or they can simply call the regulator to see or hear what their bank’s CRA rating is. From the bank’s point of view it is obvious that good safety and soundness principles dictate that good ratings be achieved and maintained. In severe instances on non-compliance, regulators can come down like a ton of bricks on a bank and this may include barring the bank from opening new locations.
Alright ladies and gentlemen, I’m sure you know your alphabet better now. There are numerous other regulations that need to be taken into account when assessing a financial institution’s lending practices. Chartwell Compliance can guide you in properly assessing and strengthening your firm’s policies and procedures.
Please contact Daniel Weiss danielweiss@chartwellcompliance.