The Directors Education Series Fair Lending Training for the Board of Directors Part I Presented by: Susan Costonis, C.R.C.M. Compliance Training & Consulting for Financial Institutions YOUR PRESENTER Susan Costonis is a compliance consultant and trainer. She has worked for large and small institutions in her 36 year career and has been a Certified Regulatory Compliance Manager since 1998. Susan has written numerous training manuals and successfully managed compliance programs and exams for institutions that ranged from a community bank to large multi state bank holding companies. She completed the ABA Graduate Compliance School, and the Graduate Banking School of the University of Colorado. She regularly presents to financial institution audiences in several states and translates complex regulations into simple concepts by using humor and real life examples. 2 1
The Director s Role Directors play an important role in the success of every financial institution by providing oversight and directing risk management. A recent ABA survey found that Fair Lending was the number one compliance concern given the more volatile regulatory environment that followed the mortgage meltdown. Fair Lending concerns have been heightened by the creation of the CFPB (Consumer Financial Protection Bureau) and expanded enforcement actions. This two part series will address key issues since Fair Lending violations can impede growth plans, impact profitability, and potentially damage the bank s reputation. 3 The Basics: Marketing, Underwriting, & Risk Management What do the regulators expect that the board understands about Fair Lending? What are the seven essential elements that will provide a strong foundation for an effective Fair Lending program? What are the risk factors for Fair Lending in underwriting? What do recent enforcement actions say about violations of Fair Lending laws during loan approval? 4 2
Measures for Compliance Directors are responsible for providing their Financial Institutions with a compliance management program that includes preventive, detective and corrective measures to insure compliance with banking laws and regulations. Preventive measures are those that help prevent violations from occurring, which can include: policies, procedures, internal controls, and training. 5 What is a Compliance Management System? An effective compliance management system has three interdependent elements: Board and management oversight Compliance program Compliance audit 6 3
A Sound Compliance Program has: Policies and procedures Training Monitoring Consumer complaint response 7 Board of Directors & Management Oversight Demonstrating clear and unequivocal expectations about compliance; Adopting clear policy statements; Appointing a compliance officer with authority and accountability; Allocating resources to compliance functions commensurate with the level and complexity of the institution's operations; Conducting periodic compliance audits; and Providing for recurrent reports by the compliance officer to the board. 4
Seven Essential Elements for Fair Lending 1. Understand the types of Discrimination 2. Understand the prohibited basis groups from the ECOA and Fair Housing Act 3. Understand the types of Fair Lending Risk Compliance Program, Overt Discrimination, Disparate treatment in Underwriting, Disparate treatment in Pricing, Disparate treatment in Steering, discriminatory potential in Redlining, Disparate treatment in Marketing 9 Seven Essential Elements for Fair Lending 4. Understand the need for consistency in consumer access to credit and oversight for Unfair, Deceptive, or Abusive Practices 5. Understand the expectations for employee discretion Balance Growth, Profits, and Fair Lending; Monitoring Exceptions 6. Training informs employees of policies, procedures & commitment to Fair Lending 7. Risk review process that includes analysis of potential discrimination on a prohibited basis compared to control groups 10 5
Exam Focus by Regulator Web Address www.consumerfiance.gov https://www.fdic.gov/ http://www.occ.treas.gov/ http://www.federalreserve.gov/ Regulator Consumer Financial Protection Bureau FDIC (Federal Deposit Insurance Corporation) OCC (Office of the Comptroller of the Currency) Federal Reserve 11 CFPB Mission Write rules, supervise companies, and enforce federal consumer financial protection laws Restrict unfair, deceptive, or abusive acts or practices Take consumer complaints Promote financial education Research consumer behavior Monitor financial markets for new risks to consumers Enforce laws that outlaw discrimination and other unfair treatment in consumer finance 12 6
Fair Lending for Board Members, Management, & Employees Boards, management & employees should understand fair lending requirements. Training should include: Prohibited bases groups under ECOA and the FHA Types of discrimination disparate treatment, disparate impact, overt discrimination Types of fair lending risk, includingunderwriting, pricing, steering, redlining, and servicing/collections Documenting underwriting and pricing decisions for exception loans and denials Consistently applying fair lending policies and procedures Retaining training content and attendance records for review by regulator Significance of recent enforcement actions Monetary penalties and Reputational Risk Creating written loan policies and procedures Following loan policies and procedures when approving exception loans 13 Fair Lending Basics Regulation B, under the Equal Credit Opportunity Act (ECOA) prohibits lenders from discriminating against credit applicants, establishes guidelines for gathering and evaluating credit information, and requires written notification when credit is denied. See the table below for the nine prohibited bases of discrimination for Regulation B. Fair Housing Act The Fair Housing Act, prohibits discrimination by direct providers of housing, such as landlords and real estate companies as well as other entities, such as municipalities, financial institutions and homeowners insurance companies whose discriminatory practices make housing unavailable to persons based on seven prohibited bases. 14 7
15 FAIR LENDING TYPES OF DISCRIMINATION General Rule Prohibiting Discrimination (Section 1002.4) Reg B prohibits financial institutions from discriminating against an applicant on a prohibited basis regarding any aspect of a credit transaction What would discourage a reasonable person? If a minority applicant is kept waiting for a long time while non minority applicants get immediate attention it would discourage that minority applicant. If an employee says directly, or indirectly, that the applicant probably won t qualify it would be considered discouraging. 16 8
Types of Discrimination "Overt evidence of discrimination," when a lender blatantly discriminates on a prohibited basis; Evidence of "disparate treatment," when a lender treats applicants differently based on one of the prohibited factors; and Evidence of "disparate impact," when a lender applies a practice uniformly to all applicants but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity. 17 Self Assessments for Fair Lending Is there a law that says you MUST conduct a fair lending risk assessment? While the answer is technically NO, even small Financial Institutions are advised to consider conducting a fair lending risk assessment to create a good foundation for internal controls. All these activities should be appropriate for the size and complexity of the Financial Institution. When conducting a risk assessment, at a minimum you should review: Written policies and procedures Board and management reports Training records 18 9
Practical Tips for Conducting a Risk Assesment At a minimum you should review: Written policies and procedures Board and management reports Training records Fair Lending Risk Factors Compliance Program 1. Underwriting 2. Pricing 3. Marketing / Advertising 4. Steering 5. Redlining 19 Fair Lending Risk Assessment Summary Chart Low Moderate High Some discretion is allowed in the underwriting and pricing process. A certain amount of subjective criteria is allowed. Loan policy is very strict and little discretion from a pricing sheet or underwriting criteria is allowed. There is no evidence of gaps in geographic or income distribution for lending There have been no fair lending complaints made to the institution or their regulator There are some gaps in geographic or income distribution for lending but they are explained by reasonable exceptions There have been a few fair lending complaints made to the institution or their regulator. The complaints were resolved on a reasonable basis The lending policy allows a high level of discretion and there is no formal loan documentation process for underwriting and pricing. There are significant gaps in geographic or income distribution for lending without reasonable explanation. There have been many fair lending complaints made to the institution and their regulator. 20 10
Mitigating Fair Lending Risks 1. Training This is a HOT BUTTON. 2. Monitoring pricing and policy exceptions 3. Reporting exceptions to the Board and/or Audit committee for review 4. Changing policy if there are excessive continued exceptions 5. Limiting any discretion in loan pricing 6. Requiring documentation of lending decisions 7. Completing a fair lending risk assessment 21 Customer complaints All the regulators have added substantial sections to their websites to help consumers file various types of complaints, including fair lending complaints. Look at your primary regulator s process Develop a complaint policy & procedures Analyze complaints Train your employees Check vendor contracts; They should be required to inform your financial institution of any complaints 22 11
CFPB and Consumer Complaints The CFPB submitted a fifth semi annual report to Congress on May 28, 2014. Here are a few of the comments about the complaint project that were found in the 178 page report. Highlights CFPB has an Office of Consumer Response, they have received over 332,300 consumer complaints on credit reporting, debt collection, money transfers, bank accounts and services, credit cards, mortgages, vehicle loans, payday loans and student loans as of March 31, 2014. In November 2013 the CFPB added debt collection complaints to the range of products Complaint process is covered under Consumer Concerns and explained on pages 14 48 of the report 23 Complaints by Product 24 12
The Four D S at the CFPB KEY TAKE AWAYS Speech, 10/24/14 They are problems we see much too often: deceptive marketing, debt traps, dead end markets, and discrimination Deceptive marketing project Know before you Owe Debt traps payday lending Dead ends 30 million Americans one in seven consumers came out of the financial crisis with one or more debts in collection; credit reporting Discrimination access to credit, complaint database more than 460,000 complaints 25 CFPB and Department of Justice VS. GE Capital June 19, 2014 CFPB Orders GE Capital to Pay $225 Million in Consumer Relief for Deceptive and Discriminatory Credit Card Practices Marketed the product as free of charge Failed to disclose consumers ineligibility Failed to disclose that consumers were making a purchase Marketed products as a limited time offer Discriminatory Credit Practices offers, GE Capital did not extend these offers to any customer who indicated that they preferred to communicate in Spanish or had a mailing address in Puerto Rico, even if the customer met the promotion s qualifications. 26 13
HUD and Maternity Leave Violation of the Fair Housing Act FirstBank Mortgage Partners has been fined $35,000 by the U.S. Department of Housing and Urban Development to settle allegations that the lender violated the Fair Housing Act by denying a mortgage loan to a couple because one applicant was on maternity leave. This instance is at least the third maternity related fine levied by HUD in the last several months. In July, HUD and the Department of Justice settled claims against Bank of America, PNC Mortgage, Cornerstone Mortgage, and MGIC, among other companies, alleging that the companies engaged in maternity discrimination. Earlier in July, mortgage lender Greenlight Financial Services was fined $48,000 to settle allegations that it violated the Fair Housing Act when it denied or delayed mortgage loans to women because they were on maternity leave. 27 HUD and Disability Violation of the Fair Housing Act August 13, 2014 Freedom Mortgage, a national residential mortgage lender based in Mt. Laurel, New Jersey, has been ordered to pay $104,000 by the U.S. Department of Housing and Urban Development to settle claims that the lender discriminated against loan applicants with disabilities. In one case, a loan applicant provided medical documentation of his disability, a Department of Labor Work Capacity Evaluation form, and a benefits statement showing regular disability payments since 2009. Nonetheless, Freedom Mortgage allegedly continued to request proof that the income would continue for at least three years. As part of the settlement with HUD, Freedom Mortgage will establish a system to provide relief to the discrimination victims, in the form of payments of $1,000, $2,000, or $5,000 in damages. 28 14
HUD and Redlining Violations October 2, 2014 HUD announced today that it has negotiated a Conciliation Agreement with Illinois based Midland States Bancorp, resolving allegations that the bank avoided doing business in predominantly African American and Hispanic neighborhoods in St. Louis, Missouri and northern Illinois. The settlement with Midland States Bancorp is the result of a housing discrimination complaint that was filed by Metropolitan St. Louis Equal Housing and Opportunity Council (EHOC), a HUD Fair Housing Initiatives Program agency. EHOC s complaint alleged that the bank delineated its service area in a discriminatory manner that excluded areas of high minority concentration, a practice known as redlining. Agreed to originate $8 million in mortgage loans in majority minority neighborhoods over the next three years, and establish a $550,000 Subsidy Fund; originate $3 million in home repair loans in majorityminority census tracts, and establish a $400,000 Subsidy Fund 29 Final Thoughts & Discussion Items Discuss the effectiveness of the bank s current Fair Lending program to detect risks in discriminatory treatment. Does our bank have any particular risks based on new products, vendor relationships, acquisition of other institutions, or expanded retail footprint? How effective is our risk assessment process for Fair Lending? Do we have adequate staff? Has training been effective? 30 15