Fair Lending Compliance Training Materials: Sharon M. McMichael, VP & CRA Officer and Design & Layout: Kristen L. Killoran, Regulatory Compliance Training Administrator National Penn Bank Hello everyone! I’m Kristen Killoran and I’m the Compliance Training Administrator for National Penn. I’m very happy to be here today to speak with you about Fair Lending. Before we begin, I have to ask you to do me a favor. Do not open you packets yet - just follow along with the screen for a few moments and don’t open your packet. This may be a test to see who can follow directions, or I could have some other reason..you’ll just have to wait and see!

Introduction to Fair Lending Why is it important to discuss equal treatment and fair lending? Treating all customers equally and fairly is very important. As a bank employee, it is illegal to treat customers differently based on a prohibited bases factor. What laws or regulations do we have? Equal Credit Opportunity Act (ECOA) – Regulation B Fair Housing Act Community Reinvestment Act (CRA) – Regulation BB Home Mortgage Disclosure Act (HMDA) – Regulation C Fair Credit Reporting Act First, let’s take a moment and talk about why this topic- fair lending- is so important to learn about and why we’re spending an hour together talking about it. I think you can all agree with me that treating all of our customers equally and fairly is very important - for business reasons as well as legal reasons. Did you know that as a bank employee, it it illegal to treat customers differently based on a prohibited bases factor? (we’ll talk about what these are later!) This especially comes into play in the lending process. There are actually a number of laws and regulations that we, as a bank, are subject to that require us to treat all people equally and in a non-discriminatory manner. They are…..REVIEW LIST.

Equal Credit Opportunity Act (ECOA) Regulation B What is the purpose of ECOA? To prevent discrimination and promote the availability of credit to all creditworthy applicants without regard to any of the “prohibited bases”. What are prohibited bases? Factors that we are forbidden to discriminate upon in any aspect of a credit transaction. Group Activity - How many do you know? As I mentioned, I want to focus on the ECOA today. I’m sure it sounds pretty familiar to everyone, right? Let’s start with its purpose. The purpose of the ECOA is to prevent discrimination and promote the availability of credit to all creditworthy applicants without regard to any of the so-called “prohibited bases”. Now I’ve mentioned these “prohibited bases” several times now. Let’s look at what they are. Prohibited bases are factors that we are forbidden to discriminate upon in any aspect of a credit transaction. PROHIBITED BASES ACTIVITY: What I’d like to do now is have you work together at your tables to see how many prohibited factors you can recognize. Each table will receive an envelope with yellow skips of paper . Inside are different factors- some are “prohibited factors” and some are not. I want you, working as a team, to separate the slips into two columns.

Prohibited Bases (under ECOA & Reg B) Race Color Religion National Origin Sex Marital Status Age Receipt of Public Assistance If all or part of the applicant's income is derived from any public assistance program Consumer Credit Protection Act If the applicant has in good faith exercised any right under the Consumer Credit Protection Act Hint: These are the 9 prohibited factors under the ECOA. Remember: Credit decisions can only be based on factors that have relevance on the applicant’s ability and willingness to repay the debt. #8 Example: Social Security, Food stamps. People often ask why this is a prohibited factor. Answer: Receipt of Public Assistance is generally associated with age (which is prohibited factor). For example – a source of income, such as social security, may indirectly disclose age. Therefore, the creditor is barred from treating an applicant less favorably than other applicants based on their age or receipt from any public assistance program. What can you consider about the public assistance is: (1) the length of time an applicant will likely remain eligible to receive such income and (2) whether the applicant will continue to qualify for benefits based on the status of the applicant or their dependents.

Lender Buck’s Loan Applicant Ed Needsit applies for an unsecured loan and he talks way too much. In his conversation with Lender Buck, he shares several pieces of information. Determine whether or not Lender Buck can consider the information or if he is prohibited from considering it. Let’s walk through an example with Lender Buck and his applicant, Ed Needsit. Hi – I’m Ed Needsit.

Ed Needsit’s Statements Can Lender Buck consider? “I have never had a checking account, credit card, or loan.”  Yes  No “I think I look old for my age. I’m 21, but think I look 35.”  Yes  No “I am a member of the Church of Ed, a religious order founded on the premise that people named Ed have divine powers.”  Yes  No #4 – NO. Marital Status is a prohibited basis (this loan is unsecured.) However, there are exceptions when you are permitted to ask about an applicant's marital status: -if the application is for joint credit -it is an app for secured credit -applicant lives in a community property state “I am married but sometimes wishes I weren’t”.  Yes  No

Ed Needsit’s Statements Can Lender Buck consider? “I know I look African American, but I’m actually Eskimo, Scandinavian, and East Indian.”  Yes  No “My current income is all derived from social security payments.”  Yes  No #6 – YES and NO. What you can’t discriminate on is the fact that Ed’s income comes only from SS payments, meaning you can’t consider the SS income any differently than you would any other income. As the creditor, we’re only concerned with if the payments are likely to continue. So, the fact that Ed’s income is solely from SS payments cannot be used as a reason for denial. With that said, if the SS payment is not enough to pay back our loan, we need to deny Ed. Certainly we need to look at whether or not Ed’s SS payments are enough to pay back our loan. If not, we will not extend credit. Keep in mind that most public assistance programs do not provide sufficient income to allow their recipients to qualify for most bank loan programs, but in those cases where the applicant would qualify, full weight must be given to the money received from the programs. Key Point to Income: Let the underwriting process do its job. “I plan to use the loan funds to develop a machine that extracts the last ounce of ketchup from the bottle.”  Yes  No

Ed Needsit’s Statements Can Lender Buck consider? “I’m interested in a single payment loan, due in 13.5 years.”  Yes  No “I’m not sure whether the earth is truly round, but believe it is actually shaped like a lifesaver .”  Yes  No

Equal Credit Opportunity Act (ECOA) Regulation B What is the scope of this law? Discrimination is forbidden in ANY aspect of a credit transaction. Everyone is involved! Individual who greets customer Loan Originator Credit Underwriting Person setting up new loan account on the computer system Let’s look at the scope of the ECOA. The ECOA actually covers just more than the underwriting process. It covers all areas of the credit extension process and applies to all employees involved in the credit application process. It is very important that everyone behaves the same throughout the process.

Lending Discrimination The courts recognize three methods of proof of lending discrimination under the ECOA and the Fair Housing Act (FHA). Overt discrimination Disparate treatment Disparate impact (effects test) Next I want to share with you the main types of lending discrimination under the ECOA and Fair Housing Act. The courts recognize these three methods of proof of lending discrimination. The third type listed - evidence of disparate impact, has never been challenged in a court of law. What happens is – a bank may put into place a practice that they feel is justified by business necessity. For example; A procedure that says “we don’t do mortgages less than $50,000.” Well, if you have that practice in a high minatory area, the total effect of that practice is going to have a negative impact on the minority community. Ultimately, everyone is treated the same.

Lending Discrimination Overt Discrimination When a lender openly discriminates on a prohibited basis “No loans to Methodists.” When a lender expresses a discriminatory preference “I’m more comfortable with people who can speak English.” Loan officers cannot express any type of preference for one group of persons over another since this showing of a preference could lead to a charge of lending discrimination. Also, it is a good idea to refrain from telling jokes that might appear derogatory to a certain ethnic group which could give the impression to a member of that group that they would be a less preferable loan applicant.

Lending Discrimination Disparate Treatment When a lender treats a credit applicant differently based on one of the prohibited bases. A non-minority couple applied for an automobile loan. The lender found adverse information in the couple’s credit report. The lender discussed the credit report with them and determined that the adverse information was incorrect. The non-minority couple was granted their loan. A minority couple applied for a similar loan with the same lender. Upon discovering adverse information in the minority couple’s credit report, the lender denied the loan application on the basis of the adverse information without giving the couple an opportunity to discuss the report. Loan officers must be mindful of developing a manner of assisting customers that allows for consistency. When assisting an applicant in completing an application they must be sure that they request the same information from every applicant. For example: if you generally request an applicant to provide you with the name of their employers for the most recent past two years to determine job and income stability you should be sure your request that same information from each applicant. That would demonstrate equal standards for all applicants when assessing job stability.

Is it discrimination?  Yes  No A lender offered a credit card with a limit of up to $750 for applicants aged 21-30 and $1500 for applicants over 30.  Yes  No A non-minority couple applies for a loan to purchase a home. The loan officer provides them with information on a number of loan programs to which they may be eligible. A minority couple also applies for a loan to purchase a home. The loan officer discusses only FHA financing.  Yes  No #1: Overt discrimination. The policy violated the ECOA’s prohibition on discrimination based on age. #2: Disparate Treatment. The applicants were similarly situated, but were treated differently based on a prohibited basis – race. They received different amounts of assistance and information from the loan officer. REMEMBER: Similarly situated applicants should receive similar treatment and the results should be similar. Consistency is key!

Thank you for your time and attention. Please contact the Compliance Department at any time with questions!