Pub. 3 2014 Issue 2

March 2014 15 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 arch 2014 15 l e i v t e f r t e k i i s t r y i k s s continued on page 16 Expanding the Fair Lending Focus to Residential Mortgage Lending In February 2013, the Department of Housing and Urban Development (“HUD”) released a final rule implementing its discriminatory effects standard in fair housing enforcement. Under the new rule, which is to be applied retroactively, HUD makes it clear that lenders can be liable for lending policies that have a disparate impact on a group of borrowers, even in the absence of any intention to discriminate. Sound familiar? Although much of the “discriminatory impact” scrutiny during recent bank compliance examinations has been focused on unsecured consumer loan pricing, the implication of HUD’s new rule is that this same type of scrutiny will be expanding to place more emphasis on residential mortgage loans. Given the similarity of the standards and objectives of HUD’s new rule with those under fair lending laws, it is reasonable to expect that regulatory examination and enforcement of the new rule will take a similar approach. HUD has even hinted at this, indicating in its release that lenders who are subject to challenge under the rule’s discriminatory effects standard of liability would likely be subject to a similar challenge under fair lending laws. Accordingly, banks should be prepared to face fair lending and fair housing challenges to their mortgage lending practices that are based solely upon the results of statistical analyses, rather than any discriminatory intent or overt discriminatory conduct. Expanding the Fair Lending Focus to Indirect Auto Lending In March of last year, the Consumer Financial Protection Bureau (“CFPB”) took things a step beyond even the no-intent required enforcement approach for fair lending. In its Bulletin on Indirect Auto Lending, the CFPB announced its plan to hold banks responsible for the discriminatory acts of unaffiliated third parties—indicating that Banks have an obligation to control the actions of the parties with whom they engage in business. In the CFPB’s Bulletin on Indirect Auto Lending, it announced that banks will be held responsible for fair lending violations by third-party auto dealers from whom the banks purchase auto loans. In particular, the Bulletin states that banks will be responsible for pricing disparity as a result of dealer discretion in marking-up the rate offered to auto purchasers in connection with auto loans. The Bulletin further states that banks will be expected to control dealer mark-up policies, monitor and address the effects of dealer mark-up policies and, in general, to ensure that third-party dealers comply with the Equal Credit Opportunity Act. In December, the CFPB was true to its threats when it and the Department of Justice ordered Ally Bank to pay $80 million in damages to borrowers whose auto loans Ally Bank had purchased. Importantly, the enforcement action was not based upon Ally Bank’s own discriminatory acts, but instead, upon pricing discrimination by the third-party dealers from whom Ally Bank purchased loans. And although the related consent order clearly states that the fair lending action was based upon alleged pricing discrimination by the auto dealers (or perhaps the Bank’s failure to prevent the discrimination) the CFPB’s headline announcing the order stated: “Ally to repay $80 million to consumers it discriminated against.” If only the CFPB had to answer for deceptive and misleading statements . . . Walking the Compliance Tightrope – How to DefendAgainst AFair Lending/Fair Housing Challenge In the current regulatory environment, bankers need to be aware of the potential landmines and take steps to defend against a potential fair lending/fair housing challenge during a compliance examination. The best defense against such a challenge can be summarized in the following important steps: • Understand why examination information is being collected and how it is likely to be used. • Stay involved in the regulatory process and be proactive in responding to the regulators’ initial findings and regression analysis. • Consider engaging outside statistical expertise at the earliest indication of an adverse finding. Step 1. Understand why examination information is being collected and how it is likely to be used. As mentioned above, in the typical examination scenario, examiners will identify a sample of loans and then gather data relating to those loans from a combination of file review and interviews with bank officers. Examiners may also ask bank officers to review a list of borrowers and confirm the ethnicity or gender of those borrowers (often simply from a list of borrower names or surnames). From this information, the regulators’ statistical experts in Washington will prepare a complex regression analysis, the results of which will determine whether the bank has apparently discriminated against its customers. Because most banks typically have a logical explanation for loan pricing other than discrimination, it is critical that information provided to examiners for use in the regression analysis be complete, accurate and reflective of the bank’s actual pricing policies. The examiner’s job is simply to ask questions (typically in a “yes/no” or “check-the-box” context) and to pass on the information to the statisticians for analysis. Consequently, bankers must be proactive to ensure that there is no disconnect between the bank’s actual pricing practices and the practices that will be reflected by the data that is collected during the examination. A flawed statistical analysis may have dire regulatory and reputational consequences for the bank. The results of a regression analysis are only as accurate as