Fair Lending 2001

Why are you here? Everyone has contact with customers You may be the first to be approached regarding a loan Know who to refer the customer to Show interest and respect for the customer

Communicate Communicate Smile :) Speak - follow up Welcome Offer to help Thank the customer

The Message You like working here - –it’s a good place to be It’s a good place for the customer to be Know and understand the bank’s products and services Communicate respect and interest

The Four Fair Lending Laws Fair Housing Act (FHA-1968) Equal Credit Opportunity Act (ECOA- 1974) Home Mortgage Disclosure Act (HMDA-1975) Community Reinvestment Act (CRA- 1977)

Equal Credit Opportunity Act General Purpose Promote equal availability to credit by all credit worthy applicants

Prohibited Bases FHA –Race or color –Religion –National Origin –Sex –Familial status –Handicap ECOA –Race or color –Religion –National Origin –Sex –Marital status –Age –Receipt of public assistance

Covered Aspects Taking applications Evaluations of apps Extending credit Credit Admin. & servicing Collection activities Loans to buy, build, repair, improve dwelling Purchase or rental of residential dwellings Selling, brokering, or appraising ECOA FHA

Types of Lending Discrimination Overt Discrimination Disparate Treatment Disparate Impact

Overt Discrimination Openly or blatant discrimination on a prohibited basis Expressing a discriminatory preference, even without acting on the preference –“We don’t like to make loans to------but” –Credit limits based on age

Disparate Treatment Different treatment based upon one of the prohibited factors Intent does not matter - More subtle Lender cannot provide a credible and legitimate nondiscriminatory explanation Occurs with marginal borrowers Red-lining and Reverse Red-lining

Disparate Impact Lender applies a policy or practice uniformly to all credit applicants, BUT Creates an adverse impact on applicants from a protected class Example - loan minimums, gross income Manifest business necessity has to be established - “Prove it”

Predatory Practices Unaffordable loans based on assets rather than ability to pay; “Flipping” Inducing repeated refinances - high points, fees; AND Engaging in fraud or deception Taking advantage of “unsuspecting or unsophisticated” borrowers.

Household International May Advocacy group pickets Nationwide protests - predatory practices –Targeting low-income borrowers –Exorbitant rates, overpriced credit insurance –Misleading terms Urging investors to sell their stock

Ford Motor Credit December 1999 Disparate treatment Discrimination against unmarried co- applicants - not counting both incomes Paid fine of $650,000 to federal government

Capital City Mortgage 1998 Predatory practices –reverse redlining –targeted African-American communities –high rates, fees, misleading borrowers Products designed to fail - makes housing unavailable Discrimination based on race

Hot Topics Predatory practices Subprime lending Credit Scoring

Subprime Lending Important lending product Enhances and meets the needs of borrowers with impaired credit; Reduced repayment capacity - –credit report –debt-to-income ratios

Subprime gone bad Vulnerable borrowers - lean resources Measurements of subprime category applied after loan decision; Steering to subprime products; High rates - High pre-payment penalties Use of non-standard ARM indexes

Avoiding Fair Lending Problems Strong written loan policy Strong underwriting standards –consistency, level of assistance, overrides –Policy V. Practice Fair lending training –at least annually for all lenders, front line Second review process - denials

Consequences of Noncompliance Civil Action Class Action Reputation risk Regulators Dept of Justice HUD

The Future What do we know and where to go from here? Proposed revisions to Truth in Lending and RESPA Closer scrutiny of consumer and commercial loans Consumer loans Vigilance - what is your bank doing, where, with whom and what it means.

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