Regardless of bank size, complexity or risk profile, there is a universal myth when it comes to Fair Lending that there has been less enforcement since 2016. The truth is that Fair lending is one of the top enforcement rules.
TCA recently attended a Fair Lending conference that included a regulatory panel discussion focusing on the current state of Fair Lending. The Fed, OCC and FDIC guest speakers said they are as busy as ever in handing out Fair Lending warnings. The number of Fair Lending MRAs have increased, although the number of public enforcement actions is down. The bottom line is that there have been fewer DOJ settlements but the prudential regulators have stepped up their Fair Lending enforcement actions. Fair Lending regulatory compliance is currently as much of a priority as it has ever been.
The panelists universally said you have to tell your bank’s Fair Lending story to the regulators; if you don’t, they will tell you what they think it is – and we all know that’s risky. You need to be able to cite the steps you have taken under the bank’s Fair Lending Program and the results. This requires a bank to provide information on peer comparisons, outreach steps and more. Also, if there is a shortcoming such as low minority lending, the bank needs to communicate its risk mitigation steps and the reasons for the heightened risk exposure. You may not be comfortable with opening up to examiners during the initial opening discussion, but it’s A Better Way.
Although the DOJ has been quieter than in past years, don’t count them out. In June 2019, they settled a DOJ-initiated discrimination investigation concerning First Merchants Bank in Indiana. Usually, referrals arise from the prudential regulators to the DOJ so this direct initiative by the DOJ is uncommon. The First Merchants agreement required various actions, such as:
- Designate a full-time Fair Lending director,
- Open a loan production office in a centralized minority-Black census tract,
- Spend $125,000 on marketing, and
- Invest $1.2 million in a fund to increase Black lending.
More unexpected was the HUD’s Fair Lending settlement with a bank once run by Treasury Secretary Mnuchin before he joined the Trump administration. OneWest Bank pledged to:
- Originate loans in minority areas,
- Originate $100 million in lending in minority neighborhoods,
- Spend $1.3 million in advertising,
- Invest $5 million in loan subsidies, and
- Allocate $1 million in education grants.
The feedback we received from recent non-public Fair Lending examinations has been insightful, too. A key focus is on Reasonably Expected Market Area (REMA; sometimes it’s called Credit Market Area or trade area). But don’t assume the REMA is the same as a CRA assessment area; it could be but it is usually larger. An easy way to visualize a REMA is to look at where the distribution of your residential mortgage loans is located on a map and overlay the location-map with a census tract map. Your REMA would include all of the census tracts where you find more than a sporadic spectrum of loans. As you move further out from your branches you will see diminished loan volume. There is no rule saying a given percentage of loans outside of the CRA assessment area triggers including those census tracts in the REMA. A vulnerability we often see is that the REMA picked by a bank is too small. Another frightening aspect of identifying a REMA is that the regulators often pick all of the census tracts to include in the REMA without the bank’s input.
Once the REMA is picked, a bank’s lending performance is compared to its REMA peers. Peer group selection is another “sore spot” faced by banks since examiners often make the selection and seldom pick similarly situated institutions. For instance, they take a bank’s volume of applications and include all lenders as peers between the benchmark of twice the bank’s volume on the high side and half as much on the low side. This process is referred to as 200% above and 50% below. Peers could be credit unions, mortgage bankers or very large banks, just to name a few unfavorable characteristics.
You might say: How did the REMA concept evolve? First, you will not find it in any law, regulations or executive order. We saw it surfaced in a 2017 FDIC presentation in Atlanta. It caught on like wildfire and was embraced by all of the regulators.
Redlining is at the heart of this REMA and peer comparison process. In the DOJ and HUD settlements described above, statistically the banks made fewer loans than their peers in the REMA and they were charged with redlining discrimination.
Also, there is a more in-depth focus on minority denied applications. When we review the denial statistics over the past few years, we see the rate of denials falling. The total percentage of denials decreased in 2016 and 2017 but went up in 2018. However, the 2018 data included mandatory HELOC denials, where applicable, which bumped up the denial rate. Without the HELOC denials, 2018 had the fewest denials of the last three-year period. Be warned: Fair Lending analysis requires digging into the numbers so you can tell your Fair Lending story.
You already know how important it is to analyze your data and your performance against your peers. Regulators, however, are not the only ones looking at the data. Consumer groups used to have to request loan data directly from the bank; now it is all publicly available from the CFPB. It’s a virtual free-for-all to gain access to the public data.
Consumer protection and special interest groups can pore over the available data to identify lenders to target for patterns of disparity. With nationwide access to HMDA information, reputation risk exposure increases.
Also, there’s been an uptick in mystery shopping to unravel unfair and unequal lending activities. All employees – from tellers to back office personnel – should receive Fair Lending training to ensure fair and equal service to all who walk through the bank’s doors, call on the phone, or communicate through electronic media.
Vendors pose added risk, too. Your Fair Lending Risk Assessment needs to address third-party risk. Such risk increases exponentially if they have personally identifiable information or are providing digital marketing services.
Complaints get the attention of examiners because they can represent the “tip of the iceberg.” One Fair Lending complaint in and of itself may not be troubling, but it can signal higher risk such as disparate lender treatment. For example, with an indirect dealer relationship complaint, is the bank also seeing the complaint? Are there complaints in the loan serving or loss mitigation area? A robust complaint awareness program with logging of complaints should be in place to monitor and trend for areas of risk, and to ensure implementation of corrective action.
HMDA resubmission has to be part of the Fair Lending discussion. Most regulatory agencies do a HMDA integrity review, especially before an exam. For the 2018 filing, banks were only instructed to resubmit their HMDA report if there were material errors. It makes sense: if you know your data is wrong, you need to fix and resubmit. In the past, once the HMDA Aggregate data was published by the Federal Reserve, it was not revised as a result of data resubmissions. Now, however, corrected HMDA peer data is being updated by the FFIEC when corrected data is resubmitted.
The message of this article is: You need to know where your Fair Lending program results stand on an ongoing basis. If your bank is uncertain of its lending patterns or potential Fair Lending risk factors, please contact TCA to schedule a call to discuss how a Fair Lending review can benefit your bank and assist with telling the bank’s story.