Fair Lending for Small Business Lenders Karen M. Neeley Kennedy Sutherland 2018

Equal Credit Opportunity Act This is not a consumer protection law! Civil rights act Prohibits discrimination against protected class: race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the fact that all or part of the applicant's income derives from any public assistance program; or the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Bureau. Kennedy Sutherland 2018

“Credit” is broad term Credit means the right granted by a creditor to an applicant to defer payment of a debt, incur debt and defer its payment, or purchase property or services and defer payment therefor. Business credit is purpose drive definition and includes ag as well as business or commercial purpose Kennedy Sutherland 2018

Applicant is broad term! Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of § 1002.7(d), the term includes guarantors, sureties, endorsers, and similar parties. US Supreme Court, in split decision, did not resolve whether “guarantors” are “applicants.” Fifth Circuit decisions support the inclusion. Kennedy Sutherland 2018

Commercial Lending Discrimination Risk Fair lending examination procedures include evaluation of commercial lending discrimination risk. May check for SBA loan data for the bank. Exams will focus on “small businesses” as they are perceived as having less experience in borrowing, fewer options and thus more vulnerable to discrimination. Kennedy Sutherland 2018

Underwriting Credit scoring model can be efficient tool. See OCC Bulletin 97-24. Must be validated for Reg B purposes. Complement with second-level review. Kennedy Sutherland 2018

Special Purpose Credit Program Authorized under Reg B, 12 CFR 1002.8 Applicants must share common characteristic: e.g. race, national origin or gender Establish and administer under written plan that Supports need for program Identifies class of applicants to benefit Establishes procedures and standards for extending credit State how long SPCP will be in effect or be reevaluated Monitor portfolio performance and adherence to Reg B Kennedy Sutherland 2018

Signature of Spouse Generally, can’t require unless joint applicant May require signature on instrument needed to reach jointly owned property relied on in extending credit May require on security instrument if necessary Kennedy Sutherland 2018

10/21/2002 Additional Parties If applicant is not creditworthy, may require a co- signer. May not require that the co-signer be the spouse! Kennedy Sutherland 2018 Karen M. Neeley - Fair Lending

Kennedy Sutherland 2018

Appraisal delivery If credit is secured by a first lien on a dwelling, applicant is entitled to automatic copy of any appraisal or valuation developed by the creditor. Single home (e.g. custom build) would trigger this requirement. BUT development secured by multiple dwellings would NOT. Kennedy Sutherland 2018

Adverse Action Notice Object originally was to educate the applicant so that he or she could correct their deficiencies and be more successful in next application for credit Kennedy Sutherland 2018

Definition of Adverse Action Refusal to grant credit in substantially the amount or on the terms requested unless counteroffer is made and accepted Termination or unfavorable change in terms of an account Refusal to increase amount of credit to person who has applied for increase Kennedy Sutherland 2018

Business Credit Applicants Same notice requirement applies if business had gross revenues of $1million or less in preceding fiscal year Statement may be oral or in writing when adverse action is taken or Statement of rights when application is taken Larger business: notify of right to a written statement of reasons upon written request Kennedy Sutherland 2018

Small Business Reporting Requirements CRA requirement for call report data on small business and small farm loans “Small” means gross annual revenues of $1M or less Aggregate number and amount of loans with principal of $100K to $250K and of more than $250K at origination Dodd Frank Act requires lenders to compile, maintain, and submit to CFPB data on credit applications by women-owned, minority-owned, and small businesses. CFPB has struggled with this! No rule 8 years later! Kennedy Sutherland 2018

CRA Evaluation Small business lending within the assessment area Within the “reasonably expected market area” Consistent with peer patterns? Kennedy Sutherland 2018

Questions? Kennedy Sutherland 2018

Kennedy Sutherland LLP Karen Neeley Kennedy Sutherland LLP 1717 W. 6th Street, Suite 441 Austin, Texas 78706 210-802-4631 kneeley@kslawllp.com www.kslawllp.com Kennedy Sutherland 2018