Tool 2: Fair Lending Legal Foundations

Transcription

1 ABAToolb x on Fair Lending ABA Members Only Tool 2: Fair Lending Legal Foundations

2 About the American Bankers Association The American Bankers Association represents banks of all sizes and charters and is the voice for the nation s $13 trillion banking industry and its two million employees. The majority of ABA s members are banks with less than $165 million in assets. ABA s extensive resources enhance the success of the nation s banks and strengthen America s economy and communities American Bankers Association, Washington, D.C. This publication was paid for in part with the dues of ABA member financial institutions and is intended solely for their use. Please call BANKERS if you have any questions about this resource, ABA membership or would like to copy or license any part of this publication. This publication is designed to provide accurate information on the subject addressed. It is provided with the understanding that neither the authors, contributors nor the publisher is engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought. This guide in no way intends or effectuates a restraint of trade or other illegal concerted action.

3 Fair Lending Legal Foundations 2 Statutory Sources of Fair Lending Law 1 Discrimination Under ECOA and FHA 6 Investigations, Referrals and Enforcement 13

4 Glossary 1994 Policy Statement on Discrimination in Lending Signed by 10 Federal government regulatory and enforcement agencies to provide their guidance to consider in determining if lending discrimination exists and to provide a foundation for future interpretations and rulemakings by the agencies. It applies to all lenders and any person who extends credit of any type. Community Reinvestment Act (CRA) The law requiring the Federal banking agencies to evaluate a bank s record of helping to meet the credit needs of its entire community, consistent with safe and sound operations. Consent Order A final, binding judicial decree or judgment memorializing a voluntary agreement between parties to a lawsuit in return for withdrawal or end to a civil litigation. Also referred to as a consent decree. Credit Transaction Every aspect of an applicant s dealings with a bank regarding an application for credit or an existing extension of credit. Discrimination To treat an applicant less favorably than other applicants on a prohibited basis in any aspect of a credit transaction. Discouragement An oral or written statement, in advertising or otherwise, to applicants or prospective applicants on a prohibited basis that would discourage a reasonable person from making or pursuing an application for credit. Equal Credit Opportunity Act (ECOA) The law that promotes the availability of credit to all creditworthy applicants. Fair Housing Act (FHA) The law that prohibits discrimination both in residential real estate-related transactions and in the terms or conditions of the sale or rental of a dwelling. Home Mortgage Disclosure Act (HMDA) The law that requires institutions to collect and report housing application and origination data. Marital Status The state of being unmarried, married or separated as defined by applicable state law. The term unmarried includes persons who are single, divorced or widowed. Monitored Data The ethnicity, race and sex data requested by the government in Regulations B and C for certain real estate related-transactions. Also referred to as government monitoring information. Prohibited Basis A personal or other characteristic that banks cannot use to treat applicants differently in the credit product life cycle. FHA and ECOA each have a list of prohibited bases, which can be found on page three of this tool. Public File A bank file containing information regarding its CRA performance available to the public. Regulation B The regulation that implements ECOA. Regulation C The regulation that implements HMDA. Similarly Situated Describes applicants, borrowers or accountholders who are similarly qualified for a credit product considering the bank s documented guidelines. Tolling Agreement An agreement executed between the bank and the Justice Department allowing the Justice Department to continue settlement negotiations for Regulation B or ECOA violations beyond the statute of limitations delineated in ECOA. Usually it means the bank agrees not to destroy any records pertinent to the negotiations even though the 25-month record retention requirement will be exceeded.

5 Statutory Sources of Fair Lending Law The foundation for fair lending legal obligations is based on two federal statutes that specifically prohibit discrimination in lending: Equal Credit Opportunity Act (ECOA) Fair Housing Act (FHA) These were both recognized in the 1994 Interagency Statement on Discrimination in Lending, which was signed by 10 government regulatory and enforcement agencies. ECOA and Regulation B A Brief Summary Enacted in 1974, ECOA prohibits a creditor from discriminating against an applicant on a prohibited basis during any aspect of a credit transaction. ECOA applies to secured and unsecured credit, including mortgage loans, auto loans, secured loans or lines of credit, credit cards, unsecured loans or lines of credit and business or commercial loans. ECOA prohibits lending discrimination on any of the following bases: Race Color Religion National origin Sex Marital status Age Receipt of public assistance Exercise of rights under the Consumer Credit Protection Act ECOA applies to all types of secured and unsecured loans, including mortgage loans, auto loans, credit lines, credit cards and commercial loans. The rules created to implement ECOA are currently contained in Regulation B. Until recently, rulemaking authority for ECOA belonged to the Federal Reserve Board. However, the Dodd-Frank Act (Dodd-Frank) transferred rulemaking authority to the Consumer Financial Protection Bureau (Bureau) in July Regulation B further clarifies the prohibitions under ECOA and provides additional technical requirements for creditors not Tool 2: Fair Lending Legal Foundations 1

6 covered expressly by ECOA. Some of the technical requirements from Regulation B are discussed further below. Additional information and guidance on the requirements under ECOA and Regulation B can be found in the following documents: Federal Reserve Board Official Staff Commentary on Regulation B; 1994 Interagency Statement on Discrimination in Lending; and 2009 Interagency Fair Lending Examination Procedures. FHA A Brief Summary Enacted in 1968 as Title VIII of the Civil Rights Act of 1968, FHA prohibits discrimination on a prohibited basis both in residential real estate-related transactions and in the terms or conditions of the sale or rental of a dwelling. A residential real estate-related transaction includes making or purchasing a loan that is secured by residential real estate or a loan that is used to purchase, construct, improve, repair or maintain a dwelling. Therefore, FHA applies both to loans with a home-based purpose and to loans where real estate is taken as collateral. However, FHA does not apply to transactions involving commercial real estate. FHA prohibits discrimination on any of the following bases: FHA applies both to loans with a homebased purpose and to loans where real estate is taken as collateral. However, FHA does not apply to transactions involving commercial real estate. Race Color Religion National origin Sex Familial status Handicap In January 2012, the Department of Housing and Urban Development (HUD) issued a final rule that protects borrowers on the basis of actual or perceived sexual orientation and gender identity, and prohibits consideration of these factors when determining a borrower s eligibility for FHA-insured mortgage financing. In addition, banks should be aware that some state anti-discrimination laws include sexual orientation and other factors as a protected class. 2 ABA Toolbox on Fair Lending

7 Rulemaking authority for FHA belongs to HUD. Notably, Dodd-Frank did not transfer rulemaking, supervisory or enforcement authority for FHA to the Bureau. In addition to HUD s regulations, additional information regarding FHA can be found in: 1994 Interagency Statement on Discrimination in Lending; and 2009 Interagency Fair Lending Examination Procedures. Rulemaking authority for FHA belongs to the Department of Housing and Urban Development (HUD). 24 C.F.R. Part 100 Distinctions between ECOA and FHA While ECOA and FHA both prohibit discrimination in lending, there are two important distinctions between the two laws. First, FHA is limited to residential real estate-related transactions or loans secured by residential real estate, while ECOA covers all extensions of credit, including both consumer and commercial. Second, Regulation B provides certain technical requirements that are meant to help further the purpose of ECOA, while the HUD regulations relating to FHA do not contain similar technical requirements. Third, while the prohibited bases outlined in ECOA and FHA have some overlap, the overlap is not exact. Only ECOA includes marital status, age, receipt of public assistance and the exercise of a person s rights under the Consumer Credit Protection Act as prohibited bases, while only FHA includes familial status and handicap as prohibited bases. See the chart below. Equal Credit Opportunity Act Fair Housing Act Race 4 4 Color 4 4 Religion 4 4 National Origin 4 4 Sex 4 4 Handicap 4 Familial Status 4 Marital Status 4 Age 4 Receipt of Public Assistance 4 Exercise of Rights Under CCPA 4 While marital status and familial status may be seen as similar prohibited bases, marital status only accounts for whether the applicant is single, married, divorced, separated or widowed, while familial status accounts for whether the applicant has children, is pregnant or has custody of children. The definition of marriage is determined by state law, so banks should be cognizant that protections afforded to consumers on the basis of marital status could vary state to state. Tool 2: Fair Lending Legal Foundations 3

8 While marital status and familial status may be seen as similar prohibited bases, marital status only accounts for whether the applicant is single, married, divorced, separated or widowed, while familial status accounts for whether the applicant has children, is pregnant or has custody of children. The definition of marriage is determined by state law, so banks should be cognizant that protections afforded to consumers on the basis of marital status could vary state to state. Community Reinvestment Act The Community Reinvestment Act of 1977 (CRA) (12 U.S.C, 2901 et seq.) was enacted to encourage FDIC-insured depositary institutions to help meet the credit needs of their entire communities, including low- and moderate-income (LMI) neighborhoods. The required contents of a bank s public file are prescribed in 12 CFR for the OCC and 12 CFR for the FDIC. Contents vary based on several factors, including bank size. The federal banking agencies periodically assess a bank s CRA performance and assign a rating to each component of their evaluation as well as an overall rating. The ratings and a detailed description of a bank s CRA performance are set forth in a CRA Performance Evaluation, which is published on the examining agency s website and must be maintained by the bank in a public file. Notably, during a CRA examination a bank s CRA performance rating can be downgraded when there is evidence of discriminatory or other illegal credit practices, including violations of FHA or ECOA. Fair Lending Implications CRA is not an anti-discrimination law, does not enumerate a list of prohibited bases and bestows no enforcement authority on regulators to prohibit violations. Therefore, prudential regulators and Justice Department may not assert discrimination under CRA regulatory provisions when asserting a redlining violation of ECOA or FHA. 4 ABA Toolbox on Fair Lending

9 Home Mortgage Disclosure Act The Home Mortgage Disclosure Act (HMDA) (12 U.S.C et seq.) was enacted in 1975 to require banks to collect information regarding a residential mortgage applicant s race, national origin and gender. it also requires banks to report annually to their regulator and to disclose to the public in aggregate form the number of home loans made annually and the geographic areas in which they were made categorized by the applicant s monitored characteristics. Additional reporting elements were imposed by Congress in 2004 covering among other items, such as the loan rate spread and lien status. Rulemaking authority for implementing HMDA was originally assigned to the Federal Reserve Board but was transferred to the Bureau under Dodd- Frank. In addition to transferring rulemaking authority, Dodd-Frank added additional new HMDA reporting elements, but those will not be required until the Bureau issues final rules defining the format and manner of reporting. Enforcement of HMDA reporting requirements is performed by agency administrative authority and includes the assessment of civil money penalties for non-compliant data collection and reporting practices. The current implementing rule for HMDA is Regulation C. Additional guidance for collecting and reporting HMDA data can be found in A Guide to HMDA Reporting: Getting It Right! ( The current implementing rule for HMDA is Regulation C. Additional guidance for collecting and reporting HMDA data can be found in A Guide to HMDA Reporting: Getting It Right! hmda/guide.htm Fair Lending Implications HMDA is a loan data collection and reporting statute not an antidiscrimination statute. The Act nevertheless has significant fair lending implications because a bank s HMDA data is made available annually to the banking regulatory agencies and general public (upon request). Using a bank s HMDA data, regulators, consumer advocacy groups and other third parties can perform regression analyses to identify banks with potential fair lending issues. Where apparent disparities exist, banks are exposed to targeted examinations, enforcement actions and private class action litigation. Tool 2: Fair Lending Legal Foundations 5

10 Discrimination Under ECOA and FHA As noted in the Interagency Statement on Discrimination in Lending, under ECOA and/or FHA, an institution may not, because of a prohibited factor, do any of the following: Fail to provide information or services or provide different information or services to an applicant during the lending process; Discourage or encourage certain applicants regarding inquiries about credit or applications for credit; Refuse to extend credit or use different standards in determining whether to extend credit for some applicants; Vary the terms of credit offered to some applicants, including the amount, interest rate, duration or type of loan; Use different standards to evaluate the collateral of certain applicants; Treat a borrower differently in servicing a loan or invoking default remedies; Use different standards for pooling or packaging loans of a class of borrowers in the secondary market; or Indicate that applicants will be treated differently or express a preference to treat applicants differently on a prohibited basis. Types of Lending Discrimination Over time, enforcement of FHA and ECOA has developed a common basis for proof of violations of either law. The courts have recognized and the regulatory agencies have articulated the following three approaches to proving illegal lending discrimination: Overt discrimination Disparate treatment Disparate impact 6 ABA Toolbox on Fair Lending

11 Overt Discrimination Overt discrimination is relatively uncommon and occurs when a lender openly discriminates against an applicant on a prohibited basis. For example, if a lender offers a credit card with a more favorable credit limit for applicants over the age of 30, this policy violates the prohibition on discrimination based on age. Or, if a lender has a specific underwriting policy that treats married joint applicants differently than unmarried joint applicants, that policy would constitute overt discrimination on the basis of marital status. Overt discrimination occurs even when a lender expresses a discriminatory preference but does not act on it. An example is a lending officer telling a potential applicant that the bank does not like to make loans to people of a certain race, but they must do so in order to comply with fair lending laws. Simply making this type of statement expresses a discriminatory preference in violation of FHA and discourages applicants on a prohibited basis in violation of ECOA and Regulation B. Overt discrimination occurs even when a lender expresses a discriminatory preference but does not act on it. Overt evidence includes not only explicit statements, but also any geographical terms used by the institution that would, to a reasonable person familiar with the community in question, connote a specific racial or national origin character. For example, if the principal information conveyed by the phrase north of 110th Street is that the indicated area is principally occupied by Hispanics, then a policy of not making credit available north of 110th Street is overt evidence of potential redlining on the basis of national origin. Overt evidence is relatively uncommon. Consequently, a redlining analysis would usually focus on comparative evidence (similar to analyses of possible disparate treatment of individual customers) in which the institution s treatment of areas with contrasting racial or national origin characteristics is compared. Disparate Treatment Disparate treatment occurs when a lender treats a credit applicant or borrower differently due to a prohibited basis at any time during any aspect of the lending process. Typically, disparate treatment exists when similarly situated applicants receive different treatment on a prohibited basis; the disfavored applicant, who is as well or better qualified than the favored applicant, receives less favorable terms or is rejected for a loan when the favored applicant is granted a loan. The lender does not have to express a prejudice or a conscious intent to discriminate under the disparate Tool 2: Fair Lending Legal Foundations 7

12 treatment standard simply treating people differently on a prohibited basis without a credible, nondiscriminatory explanation for the different treatment is sufficient. Lenders do not have to express a prejudice. Disparate treatment happens simply by treating people differently on a prohibited basis without a credible explanation for the difference. The key is making sure that each applicant is treated equally during the application process, the lending decision is based on a legitimate credit decisioning factor, and the basis for the decision is documented. An example of disparate treatment would be providing Hispanic applicants additional explanation and assistance with their loan applications, while providing Asian applicants little or no explanation or assistance with their applications. The result is Asian applicants applying for fewer loans or the lender granting fewer loans to Asian applicants because the applications were less complete than those of the Hispanic applicants who received assistance. Another example of disparate treatment involves steering applicants to products with a higher-price, higher-risk or more onerous terms on a prohibited basis instead of the applicants needs. Lenders should pay particular attention to the treatment of applicants who are neither clearly well-qualified nor clearly unqualified because there may be more need for lender discretion and whether or not an applicant qualifies may depend on the level of assistance and information provided by the lender. Using different levels of discretion or providing different levels of assistance to these applicants could raise issues of disparate treatment if applicants on a prohibited basis are treated differently. While lenders are under no obligation to provide additional information and assistance during the application process, if they choose to do so, the assistance must be provided to everyone in a nondiscriminatory manner. It is important to note that legitimate differences can exist between applicants that appear to be similar, and lenders are permitted to make lending decisions based on those legitimate differences. The key is making sure that each applicant is treated equally during the application process, the lending decision is based on a legitimate credit decisioning factor and the basis for the decision is documented. These practices enable the lender to show that it used a legitimate business purpose for the decision and did not act on a prohibited basis. 8 ABA Toolbox on Fair Lending

13 Disparate Impact Disparate impact, sometimes called effects discrimination, occurs when a lender applies a policy or practice equally to all applicants, but the policy or practice has a disproportionately negative impact on qualified applicants from a prohibited basis group. A disparate impact claim must show that the challenged policy or practice is either not justified by a valid business purpose or that the business justification could be as effective if achieved by a known less discriminatory alternative. Most claims that are alleged to be disparate impact end up as disparate treatment cases where seemingly neutral rules are actually applied differently to persons of one group as opposed to another. Statistics about the impact of particular underwriting or pricing standards have been commonly used to base a disparate impact case. Unfortunately, these statistical triggers are often misapplied because they do not identify a specific criterion at work or are based on comparisons against general prohibited bases demographics rather than the appropriate set of qualified persons in the protected class. Nevertheless, such statistically based allegations can cause lenders to spend considerable resources to rebut the assertion of disparate impact. Legitimate differences can exist between applicants that appear to be similar. Lenders can make decisions based on those legitimate differences. While the theory of disparate impact has been raised by both regulators and plaintiffs, the ongoing viability of disparate impact claims in the fair lending context is uncertain due to recent case law. In Wal-Mart Stores Inc. v. Dukes, 131 S. Ct (2011), the Supreme Court rejected an attempt to establish commonality in a class action based on discretionary conduct and regional disparities in an employment case alleging disparate impact. While this case involved employment claims, several courts have applied the case in rejecting similar commonality arguments in fair lending cases. Tool 2: Fair Lending Legal Foundations 9

14 Overview of Technical Requirements Under Regulation B Regulation B imposes technical requirements that are used to further enhance the purpose of ECOA. The following is a list of some technical requirements prescribed in Regulation B and a proposed practice pointer for complying with each requirement. Individual Credit Rule: Pointer: Individual or sole-name credit must be granted to any creditworthy applicant without regard to sex, marital status or any other prohibited basis. Applications for credit should expressly state whether the applicant is seeking individual or joint credit. In addition, when inputting loan data or when originating a loan, record the name in which the borrower applied regardless of whether it is the borrower s birth-given surname, a married name or a combined (hyphenated) surname. Lifestyle Change Rule: Pointer: A bank that maintains open-end accounts generally may not require re-application, change the original terms or terminate the account as a result of a customer s name change, change in marital status, aging or retirement. An exception can be made if there is evidence of the borrower s inability or unwillingness to pay. Re-application can be required if there is a change in marital status and the creditor had relied on the income of the borrower s spouse to repay the loan and the borrower s income at the time of the change in marital status would not support the credit line. When the marital status of a borrower has changed, loan terms or conditions should be changed only when there is evidence that deterioration in the credit has occurred. The bank generally cannot require re-application or terminate an account based on name change, change in marital status, attainment of a certain age or upon retirement. Exceptions would include evidence of an inability or unwillingness to pay, a change in marital status if the bank based qualification on the income of the spouse at the time of original application or an indication by one of the liable parties that he or she wishes to terminate responsibility for payment on the account. 10 ABA Toolbox on Fair Lending

15 Specific Co-Signer or Guarantor Not Required Rule: Pointer: When a creditor determines that a co-signer or guarantor is necessary, a specific co-signer (e.g., a spouse) cannot be required. The choice of a co-signer or guarantor must be left to the applicant, subject to the bank s approval regarding the strength added to the creditworthiness of the borrower. However, the bank may require a joint property owner or any person with an interest in the property (which may include a spouse) to sign any instrument the bank reasonably believes is necessary under state law to make the property available to satisfy the debt in the event of default. Unintended Joint Applicants Rule: Pointer: A joint applicant is someone who voluntarily applies contemporaneously with the applicant for shared or joint credit, but not someone the creditor requires as a condition for granting the credit requested. The person s intent to be a joint applicant must be shown at the time of application, and signatures or initials on a credit application affirming the applicant s intent to apply for joint credit can be used to establish intent. Simply having someone sign the promissory note is not sufficient to show intent to be a joint applicant. Banks should insure that all loan applications contain a field to identify whether the applicant is applying for individual or joint credit or otherwise have the ability to capture an applicant s intent to apply individually or jointly for credit at the time the application is made. A bank must not represent to an applicant that a loan will only be granted if it is applied for with a co-applicant. Where an applicant submits an individual application, banks must evaluate the person s creditworthiness and may only require a guarantor if the applicant does not individually qualify. Reporting to Credit Bureaus Rule: Pointer: Regulation B stipulates that both joint obligors and authorized users of an account should have the benefit (or burden) of the credit history that relates to the account. Banks must designate and report credit in the names of both spouses if both are obligated or permitted to use the account. Credit files should be indexed to allow for reporting credit histories in the name of each spouse in the case of joint accounts. Credit information should be reported to credit reporting agencies in a manner that enables the agencies to report information in the requested name or in the name of each borrower on an account. Tool 2: Fair Lending Legal Foundations 11

16 Assumption Regarding Child-bearing Rule: Pointer: When evaluating an applicant s creditworthiness, a bank cannot make assumptions or use statistics to predict the likelihood on an applicant bearing or rearing children or receiving diminished or interrupted income in the future due to bearing or rearing children. Banks must evaluate an applicant s financial condition as of the time of the application and must not consider any factors relating to the possibility of an applicant bearing and raising children or experience diminished income due to child bearing or rearing. Considering Immigration Status Rule: Pointer: A bank may consider an applicant s immigration status or status as a permanent resident of the United States, along with any additional information necessary to determine the bank s rights and remedies for repayment. While a bank may consider an applicant s immigration status, it must not take the applicant s race or national origin into account at any point during the lending process. Considering Telephone Listing Rule: Pointer: In evaluating an application, a bank cannot take into account whether an applicant has a telephone listing. However, a bank may consider whether there is a telephone in the applicant s residence. A bank should not ask if an applicant s telephone number is listed in the telephone book or independently research whether an applicant is listed either by referring to a telephone book or relying on an online telephone number listing service. 12 ABA Toolbox on Fair Lending

17 Investigations, Referrals and Enforcement Fair Lending Investigations Prior to the establishment of the Bureau, a bank s prudential regulator was primarily responsible for investigating potentially discriminatory activity that violated ECOA or FHA and referring violations to the Department of Justice (Justice Department) where applicable. The Bureau now has supervisory and enforcement authority for ECOA (for banks with $10 billion or more in total assets) but not FHA. In addition to having enforcement authority for fair lending violations following a referral by a banking regulatory agency, the Justice Department and HUD have recently begun conducting parallel investigations to regulatory investigations based on the same underlying facts. State attorneys general also have investigation and enforcement authority, which were further strengthened under Dodd-Frank. This section focuses on the investigation and enforcement process of the prudential regulators of banks with less than $10 billion in total assets that are not subject to the Bureau s supervision. For more information about the Bureau s investigation and enforcement authority, please refer to the following sources: Sections 1052 and 1053 of Dodd-Frank Interim Final Rules issued by the Bureau. 76 FR (July 28, 2011) Compliance Examination Manual Fair Lending Guidance For more information about the Bureau s investigation and enforcement authority, see Sections 1052 and 1053 of Dodd-Frank and the Interim Final Rules issued by the Bureau. 76 FR (July 28, 2011) Investigations by prudential regulators are typically initiated in one of four ways: A regulator discovers potential fair lending issues during a scheduled compliance examination. A regulator runs HMDA data through screens, detects an outlier bank and then conducts a targeted fair lending examination of the bank. Tool 2: Fair Lending Legal Foundations 13

18 A regulator conducts a targeted fair lending examination of a bank based on consumer complaints made against the bank with the regulator, a state attorney general office or a state licensing authority. A regulator identifies a potential fair lending risk by way of individual or class action litigation alleging discriminatory activity. The Justice Department Referral Process Pattern or Practice? Isolated, unrelated or accidental instances typically do not constitute a pattern or practice repeated, intentional or institutionalized practices do. If an investigation produces evidence or data that gives a prudential regulator reason to believe that a bank engaged in an individual violation of ECOA, then the regulator may refer the matter to the Justice Department. If the evidence or data gives the regulator reason to believe that a bank has engaged in a pattern or practice of discouraging or denying applications for credit in violation of ECOA, then the regulator must refer the matter to the Justice Department. Isolated, unrelated or accidental instances typically do not constitute a pattern or practice, while repeated, intentional or institutionalized practices do. With respect to FHA, all executive agencies are required by Executive Order Number to refer a matter to the Justice Department if evidence indicates a possible pattern or practice of discrimination in violation of the act. Before referring a fair lending matter to the Justice Department, a bank s prudential regulator typically will issue a 15-day letter to the subject bank stating that the regulator has made a preliminary decision to refer the matter and that the bank has 15 days to respond to the determination. In some cases, a regulator may issue a 30-day letter in lieu of a 15-day letter. A bank can request an extension of time to respond. In many cases, banks have been alerted to a regulator s concerns prior to issuance of a 15-day letter. Once a regulator affirmatively decides that it must refer a matter to the Justice Department, the agencies have different procedures for whether the bank may appeal the decision. For example, the OCC permits banks to appeal referral decisions to the agency s ombudsmen while the FDIC expressly precludes it. Federal agencies also make referrals to the Justice Department, which recently provided guidance to the agencies on pattern-or-practice cases. For a referral to be returned to a bank regulatory agency, the Justice Department said it will consider the following factors: 14 ABA Toolbox on Fair Lending

19 Whether the practice had stopped and the likelihood of its recurrence Whether the violation may have been unintentional or the result of not knowing the regulatory requirements, if the violation was more technical in nature The number of potential victims or amount of harm to any potential victims The Justice Department indicated that it would consider pursuing legal action against lenders under the following circumstances: The practice created serious financial or emotional harm to victims. The practice was not likely to stop without litigation. Potential victims couldn t be adequately compensated without legal action. Victims damages were necessary and the legal action would deter institutions from considering such actions as simply a cost of doing business. The practice was widespread within the industry or raised important policy issues, requiring legal action to stop the industry practice. The Bureau has supervisory and enforcement authority for ECOA compliance and is, therefore, not required to refer potential ECOA violations to the Justice Department. However, Dodd-Frank requires the Bureau to work together with the FTC, HUD and the Justice Department to coordinate their enforcement activities and promote consistent regulatory treatment of consumer financial products and services. To that end, the Bureau must enter into a memorandum of understanding with each agency that provides for sharing information on the agencies fair lending investigations, screening procedures and investigative techniques. The Justice Department may request additional information or documents from the bank. In CFPB Bulletin , the Bureau stated that it may give notice to individuals or firms subject to investigation prior to recommending or commencing enforcement action. If such notice is given, the Bureau stated that a response would be required in 14 days and be limited to 40 pages. The Bureau also noted that the response may be discoverable by third parties. Tool 2: Fair Lending Legal Foundations 15

20 The Justice Department Enforcement Process Upon referral of a fair lending matter to the Justice Department, the investigation will be assigned to an attorney in the Civil Rights Division. If the alleged discrimination involves mortgage lending, there is a special Housing Section within the division that was formed in 2009 by Attorney General Eric Holder to handle those fair lending referrals, which have been a high priority in the current Administration. The Justice Department may exercise its right to conduct further fact-finding by requesting additional information or documents from the bank. In many cases, banks voluntarily submit information, analyses or other evidence in an affirmative submission that defends the bank s position. The Justice Department has the authority to decline further action and refer the matter back to the regulator. At that point, the regulator may either refrain from taking further action or pursue an administrative enforcement action under 12 U.S.C such as a non-public memorandum of understanding or public consent order (cease-and-desist order). Dodd-Frank extended the statute of limitations for the Justice Department to five years. This conflicts with Reg B, which requires 25 months. If the Justice Department decides that there is sufficient evidence to file a civil action in federal district court, it will issue an authorization-to-sue letter to the bank before filing a complaint. In these letters, the Justice Department summarizes the allegations and the factual basis for the claims and typically offers the bank the opportunity to engage in pre-suit settlement negotiations. It is not unusual for the government to require a bank to execute a tolling agreement while settlement negotiations are ongoing if the statute of limitations is in danger of expiring. Notably, Dodd-Frank amended the statute of limitations provision in ECOA to extend the limitation period from two to five years. The extended statute of limitations may reduce the number of tolling agreements the Justice Department seeks. If settlement negotiations are successful, the parties will enter into a consent order. The Justice Department will concurrently file a complaint in federal court and an unopposed motion to entry of the consent order. The consent order will give the district court jurisdiction over the case for the duration of the order. Upon satisfactory completion of the conditions of the order, the Justice Department will move to dismiss the case. In the event that the Justice Department and bank are unable to reach a settlement, the Justice Department may file a complaint and litigate the matter in federal district court. 16 ABA Toolbox on Fair Lending

21 Prospects for Fair Lending Law Development There are two areas of fair lending law that are being questioned, records retention and disparate impact. Currently Section (b) of Regulation B, requires creditors to maintain certain records from consumer credit applications for 25 months (12 months for business credit applications). This is inconsistent with the extended statute of limitations provided for ECOA under Dodd-Frank. This inconsistency could present challenges for the Bureau and prudential regulators in conducting investigations. Accordingly, banks should be prepared for a forthcoming revision to the document retention rules. The applicability of the disparate impact theory to ECOA and FHA has generated much debate and controversy in the banking industry. Banks should be aware that the law is evolving with respect to the disparate impact theory. For many years, the Justice Department relied exclusively on the overt discrimination and disparate treatment theories in prosecuting fair lending cases. In 2010, the Obama Administration announced that it would pursue fair lending cases under disparate treatment and disparate impact theories, and the plaintiff s bar followed suit by filing disparate impact claims. HUD issued a proposed regulation in November 2011 defining the standards for bringing a disparate impact case under FHA. In addition, the United States Supreme Court issued an opinion in 2011 in the employment context that made it more difficult for plaintiffs to bring disparate impact claims. As of this writing in April 2012, disparate impact analysis is in the news. The Bureau of Consumer Financial Protection (CFPB) announced it would be using disparate impact analysis consistent with the established Supreme Court precedent for defining disparate impact under ECOA. The Department of Housing and Urban Development (HUD) proposed a rule for enforcing the FHA by using a disparate impact approach. Tool 2: Fair Lending Legal Foundations 17

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