Pub. 3 2014 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 14 By Stephanie Kalahurka I N THE WAKE OF THE HOUSING AND foreclosure crisis, the United States Department of Justice (“DOJ”) and federal bank regulatory agencies have made fair lending enforcement a top priority. As a result, banks have become subject to severe examination criticism, enforcement actions and even civil actions alleging discrimination in loan pricing, particularly with respect to unsecured consumer loans. Banks have endured these harsh consequences, even where there was no evidence or even any allegation that the bank intended to discriminate. In response, many community banks have revised lending policies to eliminate virtually all loan officer discretion in the pricing of unsecured consumer loans, with the inevitable result that unsecured credit is generally less available to the very consumers that the fair lending laws were designed to protect. In light of these unintended consequences, one would expect Washington and the bank regulatory agencies to take a step back and to rethink their aggressive and arguably unfair approach to fair lending enforcement. But that has not been the case. In fact, recent regulatory releases and related enforcement actions send a clear signal that regulators intend to plow ahead with this same type of enforcement—only now expanding it to hold banks responsible for the acts of unrelated third-parties. It’s a treacherous regulatory environment, and bankers will need to step carefully if they are to successfully prevent and/or and defend against a potential fair lending challenge. Fair Lending Enforcement – No Intent Necessary! An increasing number of our bank clients have come under fair lending scrutiny during recent months. The typical scenario goes something like this. During a regular compliance exam- ination, examiners identify a sample (usually, a small sample) of unsecured consumer loans. Examiners gather data relating to the pricing of these loans and the ethnicity and/or gender of the bank’s borrowers from a combination of file review and in- terviews with bank officers. This data is sent to the regulators’ statisticians in Washington, who perform a complex regression analysis to determine whether there are statistically significant differences in rates charged to minority versus non-minority borrowers sufficient to justify a finding that discrimination may have occurred. When the analysis is complete, the bank is typically given a mere fifteen days to respond to the prelim- inary examination findings. If the bank is unable to rebut the statistical analysis, the regulators will conclude that a “pattern or practice” of discrimination has occurred. Banks should understand that the finding of discrimination as a result of this type of regulatory inquiry may be – and is often – based solely upon the results of the statistical regression analysis, without any direct evidence of discriminatory conduct. BANKS BLINDSIDED BY REGULATORS’ UNFAIR APPROACH TO FAIR LENDING EXAMINATION AND ENFORCEMENT