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 16 its underlying data inputs. With this in mind, bankers should ensure that information - especially information relating to the factors considered by loan officers in making and pricing loans - is accurately and completely conveyed to examiners, and further, that the examiners are accurately and completely conveying that information to the analysts who will be preparing any regression models. Step 2. Stay involved and be proactive during and after the regulatory examination. A bank’s ability to respond to and defend alleged fair lending/ fair housing violations diminishes the further along the regulators go in the investigation and enforcement process. Moreover, once the regulators have made a referral to the DOJ or other agency, the bank will typically no longer have an avenue of appeal within the applicable federal banking agency and some form of enforcement action will become virtually unavoidable. It is important to understand the process and be aware of what is going on from the beginning. Bankers should stay in regular communication with examiners during and after the compliance examination and inquire as to the progress of the examination and the status of any findings. Generally, a bank will have several months between the time that examiners collect information and the results of the regression analysis are finalized. During this period, bank management should proactively follow-up with examiners, requesting status updates as to the progress and results of the regression analysis. It is also common for examiners to contact the bank periodically during this analysis period, requesting confirmation of certain information or following up on questions posed by the statisticians. The bank should use any such request as an opportunity to ask for a status update and, as with the initial information request, the bank should make sure that it fully understands how the information that it is providing will be used so that it may respond in a manner that will accurately reflect the bank’s actual lending practices. Step 3. Consider bringing in outside expertise at the earliest indication of adverse findings. The regression models used by the regulators to evidence fair lending/fair housing violations are complex and are prepared by statistical experts. Most banks don’t have the in-house statistical expertise to fully analyze the regulators’ regression models or to create their own, competing analysis. Accordingly, at the first indication of an adverse finding, bank management should consider consulting with experienced statistical experts to assist the bank in identifying any potential flaws or disparities in the regulators’ regression analysis and in heading off adverse examination findings. In the unfortunate event that the bank receives a formal written notice of adverse findings (typically permitting the bank a mere 15 days to respond), immediate consultation with statistical experts and regulatory counsel becomes imperative. This “15- day letter” almost always signals the bank’s last meaningful chance to request more time or to respond before the regulators’ findings become “final,” triggering the significant and costly consequences discussed above. In our experience, the regulators have been willing to provide extensions of the 15-day response period and to consider competing regression analysis at this stage. Any successful response, however, must be carefully targeted to address the quantitative data included in, and the results of, the regulators’ regression model. Be Proactive to Prevent Fair Lending/Fair Housing Criticism Even in advance of a compliance examination, all banks should take steps to review the effectiveness of their compliance management control systems as those controls relate to fair lending and fair housing. Lending policies and pricing procedures addressing all types of loans should be in place and should be reviewed regularly. These policies and procedures should prominently express the bank’s policies regarding non-discrimination against all protected classes of consumers. Any variations or exceptions from the bank’s pricing policies should be infrequent and should be approved by committee to ensure that those exceptions are being made consistently. For example, one loan officer should not make a 2% pricing exception based upon a specific factor while another loan officer makes a 1% exception based upon the same factor. All exceptions should be thoroughly documented. For banks that engage in indirect auto lending, agreements and policies should be revised to eliminate dealer discretion in marking up rates. Finally, all loan officers should receive regular and documented training on the bank’s compliance management systems, the Equal Credit Opportunity Act, the Fair Housing Act and related regulations. Careful adherence to the above recommendations may not ensure that justice is served in every case, but it will discourage the regulators from misapplying an exceedingly blunt enforcement instrument at the expense of your bank and its good reputation. Stephanie Kalahurka is Of Counsel with Spencer Fane Britt & Browne LLP. The sole focus of Ms. Kalahurka’s legal practice is the corporate and regulatory representation of financial institutions and financial service businesses. Ms. Kalahurka has represented numerous public and private financial institutions in connection with, among other things, mergers and acquisitions, regulatory issues, corporate governance and capital securities matters. Ms. Kalahurka formerly served as a bank examiner for the Texas Department of Banking. She has numerous publications regarding matters affecting the financial services industry and has served as an Editor for The Banking Law Journal. continued frompage 15