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

2. 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

3. “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

4. 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

5. 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

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

7. Special Purpose Credit Program
Authorized under Reg B, 12 CFR
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

8. 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

9. 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

10. Kennedy Sutherland 2018

11. 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

12. 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

13. 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

14. 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

15. 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

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

17. Questions?
Kennedy Sutherland 2018

18. Kennedy Sutherland LLP
Karen Neeley
Kennedy Sutherland LLP
1717 W. 6th Street, Suite 441
Austin, Texas 78706
Kennedy Sutherland 2018