fair lending and the cfpb understanding the current ... · fair lending risks • opal jones v....

FAIR LENDING AND THE CFPB

understanding the current

landscape and cost effective

compliance options

Ari Karen

Offit Kurman

[email protected]

917-312-2294

301-575-0340

Countrywide

• Countrywide Consent Decree: Investigated by New York

Attorney General

• Regression analysis by state economist alleged that

racial and ethnic differences in pricing were principally

explained by pricing exceptions and broker

compensation.

© 2010 Offit Kurman, PA. All Rights Reserved.

2

Countrywide

• Countrywide (cont’d)

• Settlement mandated that Countrywide perform

at least two regression analyses per year to

determine if material pricing differences in

pricing exceptions

• Also required to analyze whether high-minority

customer bases have higher overages than

other branches in the same MSA


3

Countrywide

• Countrywide (cont’d)

• Also required analyses of LO

compensation, loan products provided to

minority customers, educational programs

and loan file reviews.


4

Forms of Fair Lending

• Disparate Impact – neutral policy that has

discriminatory effect.

• Usually deals with manner in which loans

are priced

• Must show existence of challenged policy

AND that the challenged policy is having

discriminatory effect

• Lender is still not liable if business

necessity © 2011 Offit Kurman, PA. All Rights Reserved. 5

Disparate Impact

• Disparate impact likely to garner significant

attention – increasing trend

• To defend need to examine policies and

justification for policies

• To defend need to show that you have policies

and practices in place to prevent discriminatory

results

• Consider pricing policies, LO training, random

quarterly samplings, overview of all pricing

policies© 2011 Offit Kurman, PA. All Rights Reserved. 6

Disparate treatment

• Focus is on intentional discrimination

• Can be inferred by policy and outcome

• Potential targets

– Different geographical pricing

– Margins different at locations

– LO’s on different comp plans determined by

geography

© 2011 Offit Kurman, PA. All Rights Reserved. 7

Enforcement Uptick

• US Department of Justice creates new fair

lending enforcement unit

• US Attorney General announces

crackdown on fair lending violations

• Last but not least…


Consumer Financial Protection

Board

• Scope of coverage is very broad – applies to any

consumer financial transaction and all parties

involved with such financing

• Leadership – Director is 5 year term, nominated

by president and appointed by senate.

• CFPB has near complete autonomy

• Republicans planning all out assault on Warren.

Administration silent but getting pressure from

political left

9© 2011 Offit Kurman, PA. All Rights Reserved.

Office of Fair Lending and

Equal Opportunity

• Enforces fair lending laws including ECOA and HUMDA

• The Bureau can declare any “unfair” practice unlawful if

– causes or is likely to cause substantial injury to

consumers which is not reasonably avoidable by

consumers;

– And practice is not outweighed by countervailing

benefits to consumers or to competition.


Office of Fair Lending and

Equal Opportunity

Can declare Abusive practices illegal if:

- Takes disadvantage of consumers’ lack of

understanding

- Consumer cannot protect themselves

- Consumers reasonably rely on the covered

entities


Fair Lending

• CFPB takes over fair lending issues but does so

in conjunction with state regulators and state

enforcement as well as Federal Reserve,

USDOJ

• Will see larger more widespread issues handled

by CFPB and smaller issues – States

• More regulators=Increased enforcement

• Dodd Frank act explicitly mentions fair lending

enforcement in conjunction with overlapping of

authority.© 2011 Offit Kurman, PA. All Rights Reserved. 12

Compounding Problems

• Loan officer duty of care

• Loan officer ability to repay analysis

• Offering products for which consumer

likely qualifies

• Loan officers evaluated by pull through

rates

• All of these require and incentivize initial

evaluation and determination by loan

officer without full information© 2011 Offit Kurman, PA. All Rights Reserved. 13

FAIR LENDING MYTH

• Many believe that it is not permissible to have

any differentiation in pricing or compensation • False: for example, courts have held that even when the plaintiff can show

evidence discrediting the bank's articulated reasons for taking a certain

action, and evidence of less than thorough handling that does not conform

generally to customary industry practices, will not support an inference of

intentional discrimination without some evidence that similar "non-protected"

applications have received dissimilar treatment. Simms v. First Gibraltar

Bank, 83 F.3d 1546 (5th Cir)

• However, courts have held that, the plaintiff’s allegation that the lender

knew that offering a yield spread premium caused brokers to act in a

discriminatory manner and that the lender “targeted” minorities for higher

cost loans by “purposefully utilizing brokers who served minority

communities” was sufficient to state a disparate impact claim for racial

discrimination


14

Defending Disparate Treatment

Claim

• Force Plaintiff to establish that non-protected borrowers

were treated differently

• Plaintiff does “not have to show an exact match between

his application and the applicants outside of the

protected class who received a loan, but the comparator

loan files must be 'significantly parallel in every material

respect.'" Hood v. Midwest Sav. Bank (6th Cir. 2004)

• Even if Plaintiff can surpass that hurdle, lender can

establish non-discriminatory basis for decision to avoid

liability (recordkeeping!)


15

Defending Disparate Impact

Claims

• First step: undermine claims that there is any

discrete policy identified by the Plaintiff (ie

simply paying one LO higher bps than another

does not constitute a policy capable of

supporting DI claim unless particular pattern

established)


16


Claims

• Second step: attack Plaintiff’s ability to

provide statistical support for allegations.

• Are the statistics supported by sufficient

data? Is there a legitimate sample size?

Has the Plaintiff proven a connection

between the policy at issue and the

alleged disparity?


17


Claims

• Third Step: Establish business necessity.

• Even if there is a disparity, establish that

failure to implement the policy at issue

would cause significant competitive

disadvantages; inability to retain effective

LOs.

• No less “discriminatory” alternative

available


18

Bottom Line

• Key is to have sufficient data, records,

training and policies to support a basis for

differentiation and clear-cut,

unambiguously enforced policies

prohibiting discriminating and reducing

discretion which could form the basis for

disparate impact.


19

Damned if you do…

• First National Bank of St. Louis:

Discrimination charged fro not locating

enough branches in minority areas

• Prime Lending: Settlement for giving wide

discretion in overages resulting in

disparate treatment where there was no

monitoring in place.

• Citizens Republic Bank: Failing to offer

mortgages to residents of minority areas© 2011 Offit Kurman, PA. All Rights Reserved. 20

Fair Lending Risks

• Opal Jones v. Wells Fargo Bank – jury reaches 3.5

million dollar verdict for not offering lower price loan

products in minority areas

• Decatur Federal Savings & Loan. Failing to advertise in

minority areas

• First United Security Bank: Failing to offer mortgages to

minorities

• Barrett, et al. v. H&R Block, Inc., and Option One

Mortgage Corp., the plaintiffs assert that the wholesale

lending practices of Option One illegal because allowed

Brokers to set origination fee.


Fair Lending Risks

• Discrimination in the underwriting or pricing of loans,

such as discretionary mark-ups and fees;

• Redlining through the failure to provide equal lending

services to minority neighborhoods;

• Reverse redlining through the targeting of minority

communities for predatory loans;

• Steering minority borrowers into less favorable loans;

and

• Marital status, gender and age discrimination in

lending.


Underwriting

• Subjective or vague underwriting

guidelines

• Substantial disparities in approval/denial

rates

• Broad use of exceptions and disparities in

exceptions


Pricing

• Substantial discretion in pricing

• Substantial disparities in pricing

• Disparities reflected in HMDA data

• Risk based pricing that is subjective or

inconsistently applied

• Existence of consumer complaints alleging

fair lending


Advertising

• Advertising patterns or practices that reflect targeting or

avoidance of groups;

• Advertising only in media serving non-minority areas;

• Use of marketing programs that exclude regions with

higher percentages of minority group residents


Origination

• Substantial difference in number of

originations of minority vs. non-minority

• Substantial difference in type of loan

products

• Substantial difference in loans falling

outside 3 lowest cost alternatives


Common practices?

• Branches with different pricing or margins?

• Allowing branch level oversight on pricing and

exceptions or allowing branches to set pricing?

• Allowing brokers to set different fees/pricing?

• Unlimited discretion in pricing

• Targeted marketing to higher income areas


Relief through CFPB

• Rescission/reformation

• Refunds and returns

• Restitution

• Disgorgement

• Damages

• Penalties (Tiers 5k, 25k, 1M PER DAY)

• Public notice

• Injunction

• Recovery of costs28© 2011 Offit Kurman, PA. All Rights Reserved.

Enforcement Powers

• Can engage in joint investigations – specifically mentions

fair lending

• Can issue subpoenas and compel testimony of

witnesses

• Civil investigative demands can be issues requiring worn

written answers depositions, sworn document

productions, etc.

• Can conduct hearings and issue cease and desist orders

• Can issue temporary C&D orders without hearing

whenever needed to prevent prejudice to consumers.

• Can commence litigation on its own behalf


HMDA

• You will have the HMDA Data – Use it

• Federal law does not protect self-analysis of

loan and application files

• Only protects “new data,” such as fake mortgage

applications used for testing and compliance.

• The common law self-critical analysis privilege

may apply, depending on where you’re located,

but likely will not


Be Smart about Reports

Have Data analysis limited to one key persons

(depending on your organization’s size). They

should know:

– to keep comments to a minimum

– that not everything has to be in writing

– to be smart about what is said


Data Integrity

• Must confirm to source documentation

• Must conform to loan documents

• Failure to do so is critical and can lead to

significant problems


HMDA – Currently Required

• Application/loan identification number.

• Date application received.

• Type of loan (e.g., FHA, conventional, etc.)

• Property type.

• Purpose of loan.

• Occupancy.

• Loan amount

THIS HAS NOT CHANGED AND WILL STILL BE IN EFFECT UNTIL THE ACT BECOMES

EFFECTIVE AND CFPB ISSUES NEW RULES



• If the loan requested is for a purchase, whether there was a request for preapproval.

• Type of action taken.

• Date of action taken.

• Property of location, in terms of metropolitan statistical area.

• Census tract number.

• Ethnicity of applicant.

• Race of applicant.

THIS HAS NOT CHANGED AND WILL STILL BE IN EFFECT UNTIL THE ACT BECOMES EFFECTIVE AND CFPB ISSUES NEW RULES



• Gender of applicant.

• Income of applicant.

• Type of purchaser (to indicate whether a loan that your institution originated or purchased was then sold to a secondary market within the same calendar year).

• Reasons for denial.

• Rate spread between the APR and the applicable average prime offer rate.

• HOEPA status.

• Lien status.

THIS HAS NOT CHANGED AND WILL STILL BE IN EFFECT UNTIL THE ACT BECOMES EFFECTIVE AND CFPB ISSUES NEW RULES


Dodd Frank Adds the Following

FOR ALL COMPLETED LOANS:

– Itemization of the number and amount of loans by

age.

– Itemization of the number and dollar amount of

mortgages with respect to the total points and fees

payable at origination for the applicable mortgage.

– The APR of the applicable loan must be compared to

the benchmark rate of all relevant loans.

– Itemization of the term (in months) of any prepayment

penalty.


Dodd Frank Adds the Following

FOR ALL COMPLETED APPLICATIONS

– Value of any real property pledged as collateral.

– Term of any introductory interest rate period.

– Term of the loan in months.

– Channel through which each application was made

(e.g., wholesale, broker, etc.).

– Availability of the option to the borrower to adjust the

payment schedule.

– Applicant's credit score.


What will be done with that

Information?

In the case of mortgage bankers, CFPB will

analyze data to: – Determine how institutions are serving the housing credit needs

of their communities.

– and help identify possible discriminatory lending patterns and

assist regulatory agencies in enforcing compliance with

antidiscrimination statutes.

– Your focus should be to analyze the data with respect to

preventing and avoiding discrimination claims


Plans for Self-Analysis

• Review HMDA Data Quarterly

• You can use Vendors to do regression analysis

and also to assist with compliance -- easiest

and, depending on your size, most cost-effective

way.

• If smaller, you can analyze the Loan Application

Register information yourself

• Ensure there is responsible person for data,

training, periodic self evaluation


Self-Analysis

• Analyze branch data to determine if there

are outlying branches or loan officers

• If utilize pricing buckets examine highest

and lowest cost LO’s

• Analyze all exceptions to pricing

• Analyze on a completely random sampling

• Take account for credit/LTV/DTI/timing

• NYLX systems up to date analysis tools© 2011 Offit Kurman, PA. All Rights Reserved. 40

Do You Have A Fair Lending

Problem?

• If you have flat level pricing and no discretion to

LO’s?

• If you allow LO compensation to change over

time based on various performance criteria and

LO’s have pricing discretion?

• If you charge different pricing to reflect the LO

compensation?

• If you have different pricing to reflect cost of

business in particular region or pricing reflects

competition?© 2011 Offit Kurman, PA. All Rights Reserved. 41

Answer

• Depends on supporting documentation

and related policies, procedures and

training, self evaluation efforts

• Company’s with internal controls and

proper documentation to avoid fair lending

are in significantly better shape even if a

fair lending problem arises

• Need to know in advance your strengths

and vulnerabilities© 2011 Offit Kurman, PA. All Rights Reserved. 42

• Trained compliance staff or responsible staff

• Annual training of loan officers

• Dissemination of policies and procedures

• Organizational structure – decentralized controls and

evaluation; local discretion;

• Management and compliance oversight and attention to

fair lending

• Clearly written lending policies and procedures

• If you have discretion it is important to have well

articulated policies limiting its use


• Are marketing materials disseminated through forums

with wide appeal and/or geographically diverse areas

• Are incentives or special programs equally advertised

and equally available at all locations

• Types and extent of monitoring of advertising, pricing,

locations, policies, procedures

• Is all marketing reviewed by compliance staff including

social media and websites


THANK YOU

Ari Karen

Offit Kurman

[email protected]

917-312-2294

301-575-0340

Bill Heyman

Offit Kurman

[email protected]

301-575-0393

fair lending and the cfpb understanding the current ... · fair lending risks • opal jones v....

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