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Fair Lending > Fair Lending Laws and Regs (ECOA FHA) > Flashcards

Fair Lending Laws and Regs (ECOA FHA) Flashcards

1
Q

What transactions does ECOA apply to?

A

Extension of credit to anyone including small businesses, corporations, partnerships, and trusts.

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2
Q

What are the prohibited basis under ECOA? (8)

A
  • Race/Color
  • Religion
  • National origin
  • Sex
  • Marital Status
  • Age
  • Receipt of public assistance
  • Exercised right under Consumer Credit Protection Act
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3
Q

What transactions does FHA apply to? (4)

A

Residential real estate transactions:

  • Loan to buy, build, repair, improve a dwelling
  • purchase real estate loans
  • selling, brokering, or appraising resi real estate
  • Selling or renting a dwelling
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4
Q

What are the prohibited basis under FHA? (6)

A
  • Race/Color
  • National Origin
  • Religion
  • Sex
  • Family Status
  • Handicap
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5
Q

What prohibited basis are under both FHA and ECOA? (4)

A
  • Race/Color
  • Religion
  • Sex
  • National Origin
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6
Q

Under ECOA it is unlawful to discriminate on a prohibited basis in what types of credit transactions?

A

Any type of Credit transaction

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7
Q

Under Both ECOA and FHA is it unlawful to discriminate on a prohibited basis in what types of credit transactions?

A

Residential real estate transaction

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8
Q

Under FHA it is unlawful to discriminate on a prohibited basis in what types of transactions?

A

Any Residential Real estate transactions

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9
Q

Under one or both ECOA or FHA laws, a lender may not do what? (7)

A
  • Fail to provide information or services regarding any aspect of the lending process
  • Discourage or selectively encourage applicants on inquiries about applications or credit
  • refuse to extend credit or use different standards when determining when to extend credit
  • very credit terms offered
  • use different standards to evaluate collateral
  • treat a borrower differently in servicing/default
  • use different standards when pooling loans for secondary market
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10
Q

Discrimination on a prohibited basis applies to what parties in a transaction? (3)

A
  • applicant, prospective applicant, borrower
  • person associated with applicant, prospective applicant, or borrower (co-applicant, spouse, business partner)
  • present or prospective occupants of property, or characteristics of the neighborhood or area where property is located
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11
Q

What does FHA require of lenders regarding persons with disabilities?

A

Lender must make reasonable accommodations for a person with disabilities when needed to afford the person an equal opportunity to apply for credit.

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12
Q

What are the three types of lending discrimination?

A
  • Overt evidence of disparate treatment
  • Comparative evidence of disparate treatment
  • Evidence of disparate impact.
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13
Q

How is the existence of disparate treatment established? (2)

A
  • Overt evidence: Statements revealing a lender explicitly considered prohibited basis
  • Comparative evidence: Differences in treatment that are not fully explained by legitimate non-discriminatory factors
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14
Q

There is overt evidence of discrimination when a lender _____ discriminates on a prohibited basis?

A

Openly

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15
Q

What type of discrimination is this?

A lender offered a credit card with a limit of up to $750 for applicants aged 21-30 and $1500 for applicants over 30.

A

Overt evidence of disparate treatment:

Violation of ECOA under age discrimination

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16
Q

Can there be overt evidence of discrimination if a lender expresses-but does not act- on a discriminatory preference?

Why?

A

Yes, statements expressing discriminatory preferences violate FHA’s prohibition on statements expressing discriminatory preferences and violate ECOA, which prohibits discouraging applicants on a prohibited basis.

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17
Q

What type of discrimination is this?

A lending officer told a customer, “We do not like
to make home mortgages to Native Americans, but the law says we cannot discriminate and we have to comply with the law.”

A

Overt Evidence of Discrimination.

Even though the lender does not act on this expression it is still in violation of ECOA and FHA.

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18
Q

What is disparate treatment?

A

Is when a lender treats a credit applicant differently based on one of the prohibited basis.

Overt or comparative evidence can support disparate treatment

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19
Q

True or False: Disparate treatment requires showing that the treatment was motivated by prejudice or conscious intention to discriminate against a person beyond the difference in treatment itself.

A

False

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20
Q

Who is disparate treatment more likely to affect and why?

A

Applicants who are neither clearly well-qualified nor clearly unqualified.

Because:

  • Close case applications provide more room/need for discretion
  • qualification may depend on the level of assistance the lender provides the applicant in completing the application.
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21
Q

What type of discrimination is this?

A non-minority couple applied for an automobile
loan. The lender found adverse information in the couple’s credit report. The lender discussed the credit report with them and determined that the adverse information, a judgment against the couple, was incorrect because the judgment had been vacated. The non-minority couple was
granted their loan. A minority couple applied for a similar loan with the same lender. Upon discovering adverse information in the minority couple’s credit report, the lender denied the loan application on the basis of the adverse information without giving the couple an opportunity to discuss the report.

A

Disparate Treatment (comparative)

Both applicants are similarly situated; however, the prohibited factor of the second couple resulted in the lender providing less assistance and information, which impacted the couples qualification.

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22
Q

What is redlining?

A

Form of disparate treatment, where a lender provides unequal access to credit, or unequal terms of credit based on a prohibited characteristic of the residents of an area where a residential credit seeker does/will reside.

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23
Q

What is disparate impact?

A

When a lender applies a racially or otherwise neutral policy/practice equally to all applicants, but the policy/practice disproportionally excludes or burdens people on a prohibited basis.

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24
Q

What type of discrimination is this?

A lender’s policy is not to extend loans for single
family residences for less than $60,000.00. This policy has been in effect for ten years.

A

Disparate Impact. This minimum loan amount policy disproportionally excludes potential minority applicants from consideration because of their income levels or the value of the houses in areas in which they live.

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25
Q

True or false: A policy or practice that creates a disparity on a prohibited basis is proof of violation and disparate impact.

A

False: a policy/practice alone does not provide proof of violation. We must first determine if the practice can be justified based on business necessity.

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26
Q

What factors can be used to justify disparities based on business necessity? (2)

A

Cost

Profitability.

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27
Q

Even if a policy/practice that creates a disparity can be justified based on business necessity, can it still result in a violation?
Why?

A

Yes, a violation can still be identified if an alternative policy/practice could serve the same purpose with a less discriminatory effect.

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28
Q

Is evidence of discriminatory intent required to prove disparate impact?

A

No.

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29
Q

What three steps should examiners take to evaluate fair lending risk during the scoping process?

A
  • Develop an institutional overview to assess inherent fair lending risk.
  • If more than minimal FL risk, identify products/product groups to review and discrimination risk factors. Then evaluate the CMS for mitigating factors
  • If factors have not been fully mitigated, identify a focal point.

Identify inherent risk–>identify discriminatory risk and mitigating factors for each product type–>if not fully mitigated identify focal point.

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30
Q

When determining a bank’s inherent fair lending risk, what areas should an examiner review? (4)

A
  • structure and management
  • supervisory history
  • loan portfolio
  • credit and market operations
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31
Q

The scope of a FL examination encompasses what elements? (6)

A
  • loan products
  • loan markets
  • loan decision centers
  • loan time frames
  • prohibited basis
  • control groups
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32
Q

What documents/information should examiners consider when determining a focal point? (5)

A
  • risk factors
  • FL procedures/priorities
  • previous exam record
  • relevant guidance
  • overview of CMS
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33
Q

Can examiners use “self-tests” from the bank to streamline the scoping process for a FL review?

A

Yes, as long as the bank voluntarily discloses the “self-tests”

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34
Q

Examiners should focus a FL examination based on what? (3)

A
  • Credit operations of the bank
  • risk that discriminatory conduct may occur in those operations
  • ability to develop a reliable record of bank performance and FL compliance in those operations.
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35
Q

What relevant background information should be included when evaluating the credit operations of a bank? (8)

A
  • types and terms of credit products, product variations
  • presence of special purpose credit program
  • volume/growth in lending products
  • demographics
  • organization of credit decision making process (lending authorities, discretion/exceptions)
  • compensation program
  • quantity, quality and accessibility of relevant documentation for various loan products
  • burden of information requests on bank.
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36
Q

Can a bank’s credit market area extend beyond their CRA assessment area?

A

Yes

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37
Q

Can the FDIC hold bank’s responsible for FL violations by a bank’s direct subsidiary or affiliates?

A

Yes for subsidiaries.

For affiliates, no typically, unless the affiliate acted as the agent for the bank or the bank knew about the violation by the affiliate before becoming involved in the loan transaction or purchasing loans.

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38
Q

What FL risks may be associated with purchased loans?

A

Indication that a bank purchased loans based on a prohibited factor, or caused a prohibited factor to influence the origination process.

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39
Q

When decision-making responsibilities for a single transaction involves more than one underwriting center among a bank and its subsidiaries, what should an examiner review as part of the scope?

ex: bank has authority to decline applications, but only the mortgage company subsidiary can approve them.

A

Examiners should review if underwriting standards are applied consistently by each entity and the location of records if needed for comparison.

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40
Q

What steering risk is possible if a bank has a subsidiary?

A

Applicants being steered from the bank to a subsidiary or other lending channel based on a prohibited factor.

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41
Q

Why is it important to review third parties, such as brokers or contractors, involved in the credit decision for loans?

A

Because an institution can be found in violation of FL laws if it participates in transactions where they knew or should have known other parties were discriminating.

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42
Q

What areas of fair lending should examiners evaluate for risk involving brokers or third parties? (4)

A

Underwriting
Terms and Conditions
Redlining
Steering

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43
Q

For banks with large and geographically diverse AAs how should examiners select markets or underwriting centers for review?

A

Examiners should narrow the review to focus on the MSA or underwriting centers that present the highest discrimination risk based on LAR data.

This can be done by evaluating the denial rates between control and prohibited basis groups for each underwriting center/MSA.

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44
Q

If disparities are present in underwriting approvals/denials but there are less then 5 denials should examiners review for underwriting discrimination?

A

No volume is to low to draw conclusions. However, this can still be reviewed if other risks are present that point to underwriting risk.

ex: Pattern where almost all 19 male borrowers receive low rates, but almost all 4 female borrowers received high rates.

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45
Q

What should examiners consider when selecting products for the scoping review after understanding the bank’s credit operations? (3)

A
  • Products/prohibited basis reviewed at prior exam
  • Prohibited Basis groups that make up a significant portion of the bank’s market for different credit products
  • Any products/groups reviewed in a bank’s self assessment.
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46
Q

What are the steps for evaluating the potential for discriminatory conduct? (8)

Think FLSC categories and areas where risk can be identified.

A
  • Develop an Overview
  • Identify Compliance Program Discrimination Risk Factors
  • Review Residential Loan products
  • Identify Residential lending Discrimination Risk Factors
  • Organize and focus Residential risk analysis
  • Identify Consumer Lending Discrimination risk factors
  • Identify Commercial Lending Discrimination Risk factors
  • Complete the scoping process
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47
Q

What is included in part 1 of a fair lending review - Examination Scope Guidelines? (2)

A
  • Understanding the bank’s credit operations

- Evaluating the potential for discriminatory conduct

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48
Q

When developing an overview of an institution, what documents should an examiner review? (12)

A
  • Underwriting guidelines, policies, and standards
  • Factors used in credit scoring systems and guidance on overrides/exceptions
  • Pricing policies, models, and guidance on discretion
  • Compensation system
  • relationships with finance companies
  • Loan applications
  • HMDA LAR data
  • Loan product databases
  • records of policy exceptions or overrides, and any reporting or monitoring processes
  • consumer complaints
  • CMS materials
  • Marketing materials
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49
Q

How many compliance program risk factors are there?

A

7

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50
Q

What is the C1 risk factor?

A

Overall compliance record is weak

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51
Q

What is the C2 risk factor?

A

Prohibited basis monitoring information required by applicable laws and regulations is nonexistent or incomplete.

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52
Q

What is the C3 risk factor?

A

Data and/or recordkeeping problems compromised reliability of previous exam reviews.

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53
Q

What is the C4 risk factor?

A

Fair lending problems were previously found in one or more institution products or subsidiaries.

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54
Q

What is the C5 risk factor?

A

The size, scope, and quality of the compliance management program, including management’s involvement, designation of a compliance officer, and staffing is materially inferior to programs customarily found in institutions of similar size, market demographics, and credit complexity.

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55
Q

What is the C6 risk factor?

A

The bank has not updated compliance policies and procedures to reflect changes in law or agency guidance.

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56
Q

What is the C7 risk factor?

A

Fair lending training is nonexistent or weak.

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57
Q

In what four categories should home mortgage loans be divided into when reviewing residential loan products?

A
  • Government insured loans
  • mobile/manufactured home loans
  • wholesale, indirect, and brokered loans
  • Portfolio lending (Fannie mae/Freddie Mac rejections)
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58
Q

Should affordable housing loan programs or special purpose credit programs be evaluated alongside regular conventional loans?

A

No they should be evaluated separately for comparative purposes.

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59
Q

For each residential loan product that represents a high volume or displays noticeable growth, What documents should be reviewed for residential fair lending risk?(5)

A

For each residential loan product that represents a high volume or displays noticeable growth:

  • Lending policies
  • marketing plans
  • underwriting appraisal and pricing guidelines
  • broker/agent agreements
  • loan applications
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60
Q

When identifying residential lending discrimination risk what should be reviewed regarding geographic distribution?

A

Data regarding the distribution of the bank’s loan originations with respect to race and national origin demographics within each census tract.

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61
Q

If a bank is not a HMDA reporter, do examiners need to calculate ratios indicated in certain risk factors?

A

No, however consideration should be given in such cases where calculations could be made based on gender or racial-ethnic surrogates

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62
Q

How many Overt risk factors are there?

A

5

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63
Q

What is the O1 risk factor?

A

Including explicit prohibited basis identifiers in the bank’s written or oral policies and procedures.

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64
Q

What is the O2 risk factor?

A

Collecting information, conducting inquiries or imposing conditions contrary to express requirements of regulation B.

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65
Q

What is the O3 risk factor?

A

Including variables in a credit scoring system that constitute a basis or factor prohibited under ECOA, or for residential credit scoring systems, FHA.

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66
Q

What is the O4 risk factor?

A

Statements made by the bank’s officers, employees, or agents which constitute an express or implicit indication that one or more such persons have engages or do engage in discrimination on a prohibited basis in any aspect of a credit transaction.

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67
Q

What is the O5 risk factor?

A

Employee or bank statements that evidence attitudes based on prohibited basis prejudices or stereotypes.

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68
Q

How many Underwriting risk factors are there?

A

9

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69
Q

What is the U1 risk factor?

A

Substantial disparities among approval/denial rates for applicants by monitored prohibited basis characteristic (especially within income categories)

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70
Q

What is the U2 risk factor?

A

Substantial disparities among the application processing times for applicants by monitored prohibited basis characteristic (especially within denial reason groups)

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71
Q

What is the U3 risk factor?

A

Substantially higher proportion of withdrawn/incomplete applications from prohibited basis group applicants than from other applicants.

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72
Q

What is the U4 risk factor?

A

Vague or unduly subjective underwriting criteria

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73
Q

What is the U5 risk factor?

A

Lack of clear guidance on making exceptions to underwriting criteria, including credit scoring overrides.

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74
Q

What is the U6 risk factor?

A

Lack of clear loan file documentation regarding reasons for any exceptions to standard underwriting criteria, including credit scoring overrides.

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75
Q

What is the U7 risk factor?

A

Relatively high percentages of either exceptions to underwriting criteria or overrides of credit score cutoffs.

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76
Q

What is the U8 risk factor?

A

Loan officer or broker compensation based on loan volume (especially loans approved per period of time).

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77
Q

What is the U9 risk factor?

A

Consumer complaints alleging discrimination in loan processing or in approving/denying residential loans.

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78
Q

How many pricing risk factors are there?

A

7

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79
Q

What is the P1 risk factor?

A

Financial incentives for loan officers or brokers to charge higher prices (including interest rate, fees, and points). Special attention should be given to situations where incentives are accompanied by broad pricing discretion (P2), such as through the use of overages or yield spread premiums.

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80
Q

What is the P2 risk factor?

A

Presence of broad discretion in loan pricing (including interest rate, fees and points), such as through overages, underages or yield spread premiums. Such discretion may be present even when bank’s provide rate sheets and fee schedules, if loan officers or brokers are permitted to deviate from those rate and fees without clear and objective criteria.

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81
Q

What is the P3 risk factor?

A

Use of risk-based pricing that is not based on objective criteria or applied consistently.

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82
Q

What is the P4 risk factor?

A

Substantial disparities among prices being quoted or charged to applicants who differ as to their monitored prohibited basis characteristics.

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83
Q

What is the P5 risk factor?

A

consumer complaints alleging discrimination in residential loan pricing.

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84
Q

What is the P6 risk factor?

A

In mortgage pricing, disparities in the incidence or rate spreads of higher-priced lending by prohibited basis characteristics as reported in the HMDA Data.

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85
Q

What is the P7 risk factor?

A

A loan program that contains only borrowers from a prohibited basis group, or has significant differences in the percentages of prohibited basis groups, especially in the absence of a special purpose credit program under ECOA.

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86
Q

How many Steering risk factors are there?

A

8

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87
Q

What is the S1 risk factor? (3)

A

Lack of clear, objective and consistently implemented
standards for (i) referring applicants to subsidiaries,
affiliates, or lending channels within the institution (ii)
classifying applicants as “prime” or “sub-prime”
borrowers, or (iii) deciding what kinds of alternative
loan products should be offered or recommended to
applicants (product placement).

88
Q

What is the S2 risk factor?

A

Financial incentives for loan officers or brokers to place applicants in nontraditional products or higher cost products.

89
Q

What is the S3 risk factor?

A

For a bank that offers different products based on credit risk levels, any significant differences in percentages of prohibited basis groups in each of the alternative loan product categories.

90
Q

What is the S4 risk factor?

A

Significant differences in the percentage of prohibited basis applicants in loan products or products with specific features relative to control group applicants. Special attention should be given to products and features that have potentially negative consequences for applicants.

91
Q

What is the S5 risk factor?

A

For an institution that has one or more sub-prime
mortgage subsidiaries or affiliates, any significant
differences, by loan product, in the percentage of prohibited basis applicants of the institution compared to
the percentage of prohibited basis applicants of the
subsidiary(ies) or affiliate(s).

92
Q

What is the S6 risk factor?

A

For an institution that has one or more lending channels that originate the same loan product, any significant differences in the percentage of prohibited basis applicants in one of the lending channels compared to the percentage of prohibited basis applicants of the other
lending channel.

93
Q

What is the S7 risk factor?

A

Consumer complaints alleging discrimination in residential loan pricing or products placement.

94
Q

What is the S8 risk factor?

A

For an institution with sub-prime mortgage subsidiaries,
a concentration of those subsidiaries’ branches in
minority areas relative to its other branches.

95
Q

How many Redlining Risk factors are there?

A

12

96
Q

What is the R1 risk factor?

A

*Significant differences, as revealed in HMDA data, in the number of applications received, withdrawn, approved not accepted, and closed for incompleteness or loans originated in those areas in the institution’s market that have relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents.

97
Q

What is the R2 risk factor?

A

*Significant differences between approval/denial rates for all applicants (minority and non-minority) in areas with relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents.

98
Q

What is the R3 risk factor?

A

*Significant differences between denial rates based on insufficient collateral for applicants from areas with
relatively high concentrations of minority residents and
those areas with relatively low concentrations of minority residents.

99
Q

What is the R4 risk factor?

A

Significant differences in the number of originations of
higher-priced loans or loans with potentially negative
consequences for borrowers, (i.e., non-traditional mortgages, prepayment penalties, lack of escrow
requirements) in areas with relatively high concentrations
of minority residents compared with areas with relatively low concentrations of minority residents.

100
Q

What is the R5 risk factor?

A

Other patterns of lending identified during the most recent CRA exam that differ by the concentration of minority residents.

101
Q

What is the R6 risk factor?

A

Explicit demarcation of credit product markets that
excludes MSAs, political subdivisions, census tracts, or other geographic areas within the institution’s lending market or CRA assessment areas and having relatively high concentrations of minority residents.

102
Q

What is the R7 risk factor?

A

Difference in services available or hours of operation at branch offices located in areas with concentrations of minority residents when compared to branch offices located in areas with concentrations of non-minority residents.

103
Q

What is the R8 risk factor?

A

Policies on receipt and processing of applications,
pricing, conditions, or appraisals and valuation, or on any other aspect of providing residential credit that vary between areas with relatively high concentrations of minority residents and those areas with relatively low concentrations of minority residents.

104
Q

What is the R9 risk factor?

A

The institution’s CRA assessment area appears to have been drawn to exclude areas with relatively high
concentrations of minority residents.

105
Q

What is the R10 risk factor?

A

Employee statements that reflect an aversion to doing business in areas with relatively high concentrations of minority residents.

106
Q

What is the R11 risk factor?

A

Complaints or other allegations by consumers or
community representatives that the institution excludes or restricts access to credit for areas with relatively high
concentrations of minority residents.

107
Q

What is the R12 risk factor?

A

An institution that has most of its branches in predominantly non-minority neighborhoods at the same time that the institution’s sub-prime mortgage subsidiary has branches which are located primarily in predominantly minority neighborhoods.

108
Q

How many marketing risk factors are there?

A

7

109
Q

What is the M1 risk factor?

A

Advertising patterns or practices that a reasonable person would believe indicate prohibited basis customers are less desirable.

110
Q

What is the M2 risk factor?

A

Advertising only in media serving non-minority areas of the market

111
Q

What is the M3 risk factor?

A

Marketing through brokers or agents that the bank knows (or has reason to know) would serve only one racial or ethnic group in the market.

112
Q

What is the M4 risk factor?

A

Use of marketing programs or procedures for residential
loan products that exclude one or more regions or
geographies within the institutions assessment or
marketing area that have significantly higher
percentages of minority group residents than does the remainder of the assessment or marketing area.

113
Q

What is the M5 risk factor? (2)

A

Using mailing or other distribution lists or other marketing techniques for pre-screened or other offering of residential loan products that:

  • Explicity exclude groups of prospective borrowers on a prohibited basis
  • Exclude geographies within the market area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.
114
Q

What is the M6 risk factor?

A

Proportion of prohibited basis applicants is significantly lower than that group’s representation in the total population of the market area.

115
Q

What is the M7 risk factor?

A

Consumer complaints alleging discrimination in advertising or marketing loans.

116
Q

What is a surrogate?

A

Any factor related to a loan applicant that potentially identifies that applicant’s race, color, or other prohibited basis characteristics in instances where no direct evidence of that characteristic is available. (Ex: Surname)

117
Q

If there is more than one focal point identified, how should examiners set the scope? (4)

A

Prioritize focal points for each product/prohibited factor on the basis of:

  • high number and/or severity of risk factors
  • high data quality and other factors affecting the likelihood of obtaining reliable examination results
  • high loan volume and the likelihood of widespread risk to applicants/borrowers
  • low quality of any compliance program
118
Q

What does the compliance management review (PT2) enable examiners to determine? (2)

A
  • the intensity of the current exam based on the evaluation of the compliance management measures used by the bank
  • reliability of the bank’s practices and procedures for ensuring continued fair lending compliance.
119
Q

What should the compliance management review focus on? (2)

A
  • determine if the Policies/ procedures of the bank allow management to prevent, identify, and self correct, disparate treatment identified for further analysis in the first part of the review (focal points)
  • obtain an understanding of how management addresses its fair lending responsibilities with respect to lending practices and standards, training, guidance, and marketing.
120
Q

What should examiners determine and document regarding overt discrimination in written policy or communication? (5)

A
  • Precise language used and fair lending concerns raised
  • bank’s stated purpose for adopting the policy and who issued the policy
  • how and when it was put into effect
  • how widely the policy was applied
  • if and to what extent applicants were adversely impacted by the policy
121
Q

What should examiners determine and document regarding oral or unwritten overt discrimination? (5)

A
  • nature of statement/practice and fair lending concerns raised
  • who is making the statement or applying the practice, why, and who authorized it
  • how and when it was put into effect
  • how widely it was applied
  • if and to what extend applicants were impacted.
122
Q

What steps should be taken when performing a transactional underwriting analysis?

A
  • Set sample size
  • Determine sample composition
  • compare approved and denied applications
  • expand sample if evidence of violations but `not enough to establish pattern or practice
  • discuss findings with management and document appropriately.
123
Q

What are the two samples selected for a transactional underwriting analysis?

And how do you determine the size?

A

for each focal point selected there are two samples:

  • prohibited basis group denials
  • control group approvals

Size is determined based on the Fair lending Sample size tables in the appendix. using the number of target group denials and the number of control group approvals during a 12 month period.

124
Q

What if the number of target group denials or control group approvals is too high or too low based on the sample table?

A

to high-select a shorter period to sample from

to low- no need to attempt transaction testing, Discuss with supervisor if there is more than one focal point

125
Q

How do you determine the sample composition for a comparative file review (underwriting)? (3)

A
  • request loan exceptions and include all exceptions applicable to the focal point
  • Select approved and denied applicants based on criteria that maximized the likelihood of finding marginal approved/denied applicants
  • if the two above are not feasible, select a random sample
126
Q

What are the three steps to performing an underwriting comparative file review?

A
  • Create applicant profile spreadsheet
  • Complete applicant profiles
  • review and compare profiles
127
Q

What should be included when creating the applicant profile spreadsheet during an underwriting comparative file review?

A
  • Categories of data based on the bank’s written or articulated credit standards for each loan product (ex: branch location, underwriter)
  • Always include (income, loan amount, debt, credit score, etc)
  • comments block
128
Q

What is the principal goal when completing applicant profiles during an underwriting comparative file review?

Why?

A

to identify cases where similarly qualified prohibited basis and control group applicants had different credit outcomes.

BC, discrimination is more likely to occur with applicants who are not either clearly qualified or unqualified (marginal applicants)

129
Q

What should be done if there are few marginal control groups able to be identified in the initial sample when selecting the sample for an underwriting comparative file review?

A

-expand your review beyond the initial sample and review additional files of approved control group applicants.

This will either increase number of marginal approvals, or confirm that marginal approvals are so infrequent that marginal denials are unlikely to involve disparate treatment.

130
Q

How should marginal target and control group applicants be selected and why?

A

in a back and forth manner to facilitate close matches and a more consistent definition of marginal between the two types of loan files.

131
Q

When documenting the data from files in the underwriting comparative file review spreadsheet, what information is important to document regarding the marginal files identified? (2)

A
  • the extent of any assistance (affirmative aid, waivers, partial waivers) which enabled marginal control group applicants to overcome credit deficiencies
  • extent of marginal target group applicants with similar deficiencies were or were not provided similar aid, waivers or assistance.
132
Q

What do examiners look for when reviewing and comparing files during an underwriting comparative file review? (3)

A
  • unexplained deviations from credit standards
  • inaccurate reasons for denial
  • incorrect disclosures
133
Q

Which DTI ratio should be used when considering the following two applications during an underwriting comparative file review?

a control group applicant’s DTI ratio was lowered to 42% because the institution decided to include short-term overtime income and a prohibited basis group applicant who was
denied due to “insufficient income” would have had his
ratio drop from 46% to 41% if his short-term overtime
income had been considered. Which DTI should be used for the target group applicant?

A

-Examiners should consider the 41% not the 46% in determining the benchmark.

Examiners must adjust the facts compared between applicants so that assistance, waivers, or acts of discretion are treated consistently between applicants.

134
Q

How do you determine the “benchmark applicant” in an underwriting comparative file review?

A

-for each reason for denial within the target group, rank the denied applicants beginning with the applicant whose qualification related to the reason for denial is least deficient.

The top ranked denied applicant for each denial reason is the benchmark applicant.

135
Q

When comparing control and benchmark applicants for each reason for denial, what scenario would determine there is no disparate treatment?

A

if there are no approvals who are equally or less qualified than the benchmark applicant.

136
Q

What should be done if there are approvals that appear no better qualified than the denied benchmark applicant during a comparative file review? (2)

A
  • Identify the approved loan on the worksheet as an overlap approval
  • compare the overlap approval with other prohibited basis denials in the benchmark ranking to determine if additional overlaps exist.
137
Q

What steps should be taken with there are potential disparities in pricing and other terms and conditions? (3)

A
  • determine sample selection
  • determine sample composition and create applicant profiles
  • review terms and conditions, compare with borrower outcomes
138
Q

How do you determine the sample selection for pricing comparative file reviews?

A

use sample sizes table to determine appropriate sample size based on the number of target group and control group originations for each focal point in the last 12 months.

139
Q

How should examiners determine the sample composition for pricing comparative file reviews? (3)

A
  • tailor sample to specific pricing factors/terms and conditions (underwriting factors should not be used)
  • group the target and control group borrowers based on a range of dates to ensure the bank’s pricing practices were the same for both applicants. (loan origination date, loan application date)
  • identify data to be analyzed for each focal point and record for each borrower in the spreadsheet (ex: products with different pricing implications)
140
Q

What must be done as part of a comparative file review for pricing? (5)

A
  • Review all loan terms and conditions (rate, points, fees, maturity, LTV, collateral) with special attention to those that a subject to discretion. And for each term identify:
  • -target group borrowers in the sample who were treated unfavorably with respect to the term or condition
  • -control group applicants in the sample who were treated favorably with respect to the term or condition.

-identify any control group borrowers with creditworthiness less than or equal to the target group, who were treated better than target group applicants

  • get explanations from the bank for any findings
  • expand the sample if there is not enough evidence of a pattern or practice
  • discuss differences between comparable loans with the bank and document findings.
141
Q

What potential fair lending risk does this present?

Bank offers different lending products based on credit risk levels.

A

Steering risk: This may present opportunities for loan officers or brokers to illegally steer applicants to higher risk products

142
Q

What potential fair lending risk does this present?

Bank offers nontraditional loan products or loan products with prepayment penalties.

A

Steering risk: may present opportunities for loan officers or brokers to illegally steer applicants to certain products or features.

143
Q

What potential fair lending risk does this present?

Bank offers prime or sub-prime products through different channels

A

Steering risk: may present opportunities for applicants to be illegally steered to the sub-prime channel.

144
Q

What steps are taken for a steering analysis focal point? (7)

A
  • Clarify what options are available to applicants
  • Document policies, conditions, or criteria that have been adopted by the bank for determining how referrals are made and how choices are presented to applicants.
  • Determine how referral decisions are made and documented
  • Determine level of individual discretion exercised when deciding what loan products are made available to applicants
  • Determine if policies and procedures are followed.
  • If discretion is present, conduct a comparative file review
  • Consult with supervisors regarding contacting applicants to substantiate steering analysis.
145
Q

In a steering analysis, how should examiners clarify what options are available to applicants?

A

Through interviews and reviewing bank documents, verify the following for each product or feature:

  • Underwriting criteria used by the bank, subsidiary, and affiliates for each product or feature and their alternatives.
  • Pricing or other costs applicable to the product and alternative products (interest rates, points, fees)
146
Q

What is an example of a product or feature of a loan? Steering

A

Products: stated income, negative amortization, option ARMs

Feature: prepayment penalties, escrow requirements

147
Q

In a steering analysis, what should examiners look at for step 2 “document the policies, conditions, or criteria that a bank has adopted for determining how referrals are made and how choices are presented to applicants”? (3)

A
  • Determine volume of referrals made from or to the bank for each product during the relevant time period
  • Identify referral policies and procedures, especially for subsidiaries, and between products or lending channels.
  • Determine if there are financial incentives to make referrals, or for specific products or features.
148
Q

In a steering analysis, what should examiners look for in the bank’s policies and procedures?

A
  • Identify policies and procedures for:
  • -Referring a person who does not meet criteria to another lending channel, subsidiary, or affiliate

–offering one or more alternatives to applicants, who do not meet criteria for their original product choice

–referring a person who applied to a subsidiary or affiliate, but appears to qualify for a loan from the bank.

–referring a person who applied through one lending channel but appears to qualify for a loan through another lending channel.

149
Q

In a steering analysis, how would you determine if written policies and procedures match bank practices? (2)

A
  • Enter data from the target group sample on spreadsheet and determine if the bank is applying criteria as stated.
  • If actual treatment of target group sample differs from the bank’s stated criteria document and discuss with management.
    ex: announced criteria of DTI ratio of no more than 38% was required for receiving a “more favorable” prime mortgage, review spreadsheet to determine if that criteria was adhered to.
150
Q

What types of applicants should be included in the sample for a focal point review under a steering analysis?

A
  • Target group applicants who received “less favorable” treatment (referral to subsidiary or affiliate, or counteroffers with less favorable products)
  • Marginal applicants
151
Q

What categories of data should be included in the spreadsheet for a steering comparative file review?

A

-underwriting criteria and referral criteria used in reaching underwriting and deferral decisions between different products.

152
Q

how do you determine the benchmark applicant in a steering analysis? (2)

A
  • review “less favorably” treated applicants from the target group and rank them from least qualified to most qualified.
  • identify the best qualified target group applicant, based on the criteria identified for the control group.
153
Q

How do you determine the control group applicants in a steering analysis?

A

Identify applicants who were treated “more favorably” with respect to the same product-alternative product pair as the target group.

154
Q

How do you compare the two samples in a steering analysis? (4)

A
  • compare qualifications of benchmark applicant with control group applicants, starting with least qualified control group applicant
  • identify and document overlap applicants (applicants from control group who appear less qualified than benchmark applicant)
  • compare overlap applicants with less qualified target group applicants to determine if other overlaps exist.
  • document overlaps as possible disparate treatment and discuss with management.
155
Q

When reviewing commercial lending for fair lending risk what types of applicants should be focused on and why?

A

Small businesses with GAR of $1MM or less as they likely have fewer borrowing options, which makes them more vulnerable to discrimination.

156
Q

What are the steps to perform a transactional underwriting analysis on commercial loans? (3)

A
  • Understand commercial loan policies
  • Conduct Comparative file review
  • Conduct targeted Sampling
157
Q

What should examiners do to understand commercial loan policies during a commercial underwriting focal point? (2)

A
  • review credit policy guidelines

- conduct a criteria interview to articulate standards used for underwriting commercial loan applications

158
Q

What sample size and time period should be used for commercial underwriting file reviews?

A
  • Max of ten denied applications during 3 month period prior to exam.
  • unless the bank has a significant volume of commercial loans then more than 10 should be selected.
159
Q

What types of denied applications should examiners include in a commercial target group for an underwriting file review? (2)

A

Denied apps from businesses that are:

  • located in a minority/integrated geography
  • appear to be owned by minority group members, based on applicant names
160
Q

What information from target group applicants should be recorded during a commercial underwriting file review? (4)

A

Information about:

  • principal owners
  • purpose of the loan
  • type of business
  • financial information about the business that was used to evaluate the application
161
Q

What should be done if a bank is maintaining or using data that identifies prohibited basis characteristics for individuals involved with a business application?

A

The maintenance and use of the data should be evaluated as a potential violation of ECOA.

162
Q

How many and What types of loans should be selected for a control group sample in a commercial underwriting file review? (5)

A

10 Approved loans that appear to be similar to the denied loans regarding:

  • business type
  • loan purpose
  • loan amount
  • loan terms
  • type of collateral
163
Q

For the following target group sample in a commercial underwriting file review, what control sample should be selected?

The denied sample includes applications for lines of credit to cover inventory purchases for retail businesses.

A

Approved applications for lines of credit from retail businesses.

164
Q

After selecting the samples, What steps should be taken to perform a file review for commercial underwriting? (4)

A
  • obtain and record information from control group apps that is parallel to target group apps
  • Compare credit criteria considered for both samples with established underwriting standards, rather than comparing files directly.
  • Identify deviations from credit standards for both samples, and differences in loan terms granted to approved credit requests.
  • discuss and document deviations from credit standards with commercial underwriter.
165
Q

After discussing findings from the file review with commercial, what steps should examiners take to conduct targeted sampling? (4)

A
  • determine if deviations from credit or pricing standards, which are unexplained, are detrimental to any protected classes
  • consider using proxys to determine race and gender of commercial applicants.
  • if any target group applicants received less favorable terms, select additional samples for the same prohibited basis and and similarly situated control group applicant to determine if there is a pattern or practice.
  • if there are not enough similarly situated applicants expand the sample period.
166
Q

What are the expanded sampling guidelines for commercial file reviews? (3)

A
  • select a sample large enough to draw a reasonable conclusion
  • select applicants from the initial sample period, that were not included in the initial sample, expand period if needed
  • expanded sample should include both approved and denied prohibited basis and control group applicants, where similar credit was requested by similar businesses for similar purposes.
167
Q

What is redlining?

A

Illegal disparate treatment where a bank provides unequal access to credit, or unequal terms of credit because of the race, color, national origin, or other prohibited characteristic of the residents of the area in which the credit seeker resides or will reside.

168
Q

What is reverse redlining?

A

practice of targeting certain borrowers or areas with less advantageous products or services based on prohibited characteristics.

169
Q

What can a redlining analysis be used to determine? (4)

A

Whether on a prohibited basis:
-a bank fails or refuses to extend credit in certain areas

  • a bank targets certain borrowers or certain areas with less advantageous products
  • a bank makes loans in an such area but at a restricted level or with less favorable terms/conditions than contrasting areas
  • a bank omits or excludes an area from efforts to market residential loans or solicit customers for residential credit.
170
Q

True or false:

ECOA and FHA specifically prohibit redlining

A

False: neither specifically uses the term redlining.

However, interpretations for FHA include it as prohibiting banks from having different marketing or lending practices for certain geographies compared to others, where the purpose or effect is discrimination.

ECOA would prohibit treating applicants for credit differently on the basis of differences in the racial or ethnic composition of the neighborhood.

171
Q

What type of fair lending risk does this present?

Policy states the bank will not make credit available north of 110th street and it is commonly known the area in question is principally occupied by Hispanics.

A

Overt redlining risk on the basis of national origin.

172
Q

What are the six steps to performing a comparative redlining analysis?

A
  • Identify and delineate areas in the bank’s AA or REMA for residential products that have racial or national origin character
  • determine if the identified minority areas appear to be excluded, under-served, selectively excluded from marketing, or treated less favorably by the bank
  • Identify and delineate areas in the AA or REMA for resi products that are non-minority and appear to be treated more favorably
  • Idenify any minority areas located just outside the AA and market area for resi that the bank may be avoiding
  • get the bank to explain apparent differences in treatment between areas and determine if credible and reasonable
  • obtain and evaluate other info that may support or contradict interpreting disparities to be the result of unintentional illegal discrimination.
173
Q

For redlining comparative analysis what step should be taken if analysis such as R1, R2, or R3 may already be documented prior to starting the comparative file review?

A

Where the scoping process has produced reliable factual record, the examiners should begin with Step 5, obtaining an explanation from the bank.

174
Q

What does a redlining analysis focus on?

A

Focuses on the bank’s decisions about how much access to credit to provide to different areas.

175
Q

What are the best areas to use for a comparison in a redlining analysis?

A

Areas where the bank marketed and provided credit, and where it could reasonably be expected to have marketed and provided credit. Those areas might be beyond or different from the AA.

176
Q

What should be done during step one of a comparative redlining analysis, Identifying areas that are of a prohibited basis character in the resi AA or REMA? (3)

A
  • Describe in percentages why a specific area is identifiable as having the identified character
  • Describe how the area’s character changes across the suspected redlining area’s boundaries
  • Document or estimate the demand for credit, within the area. (percentage of homeowners, median housing value, income, etc. )
177
Q

In a comparative redlining analysis, how can you document or estimate the demand for credit in a minority area? (4)

A
  • Identify the demographics of an area
  • review the bank’s non-originated applications from the suspected redlined areas.
  • Review aggregate bank data for loans originated or applications received from the area.
  • Discuss demand for credit with a community contact.
178
Q

What should examiners do in a redlining comparative review to determine if the identified minority area is excluded, under-served, selectively excluded from marketing, or less favorably treated by a bank? (3)

A
  • review CRA lending test for underserved or excluded areas that match the potentially redlined area.
  • determine if bank policy treats any area differently within market or service area through (marketing, branch ops, appraisal practices) or any policy or practice related to access to credit. See if any identified areas match the potentially redlined area.
  • ask the bank for:
  • -reasons for policy differences
  • how differences are implemented
  • -any conditions that exist in an area for it to receive the different treatment.
179
Q

In a redlining comparative analysis, step 3, how should examiners identify and delineate areas in the AA or REMA that are non-minority and treated more favorably? (4)

A
  • document % of control group and racial/ethnic groups living in the non-minority area.
  • document nature of housing stock in area
  • Describe how bank policies or procedures or rate of lending change from less to more favorable as one leaves the minority area.
  • Consider if the MMCT has enclaves of non-minorities, or if the edges of the CT are mostly non-minorities. And compare if credit access in non-minority areas changes from the larger minority areas.
180
Q

What should examiners do for step 4 of a redlining comparative analysis?

Identify location of minority areas just outside the AA, market area, such that the bank may be avoiding such areas.

A

Look at previous exam AAs and REMAs and see if it was influenced by prohibited basis factors. Determine if they ought to be included in the redlining analysis.

181
Q

When obtaining explanation from the bank for differences in treatment in a redlining comparative analysis, how should examiners present to the bank the apparent disparate treatment that needs explained?

A

For each matter that requires explanation, provide the institution full information on what differences appear to exist in how it treats minority and non-minority areas. Also explain how examiners reached preliminary conclusions.

182
Q

When obtaining information from the bank in a redlining comparative review, what should be asked if the following is true?

The conditions the bank used to justify more favorable treatment are present in minority areas that received less favorable treatment.

A

If there are minority areas for which those conditions existed, ask the institution to explain why the areas were treated differently despite the similar conditions.

183
Q

When obtaining information from the bank in a redlining comparative review, what should be asked if the following is true?

The conditions the bank used to justify less favorable treatment are present in non-minority areas that received more favorable treatment nevertheless.

A

If there are non-minority areas for which those conditions existed, ask the institution to explain why those areas were treated differently, despite the
similar conditions.

184
Q

What should examiners do for step 6 in a redlining comparative review, “obtain and evaluate other information that may support or contradicts a finding”? (5)

A

Consider additional information from:

  • comparative file review for a different focal point
  • Interviews of third parties
  • Marketing
  • Peer Performance
  • Institution’s Record
185
Q

In a redlining comparative review, how can you use another comparative review to support redlining findings? (4)

A

To compare denied applications from the suspected redlined area to approved apps from the contrasting area and learn:

  • If there were denials from qualified applicants from the suspected redlined area
  • If there are instances of disparate treatment against applicants of the same prohibited basis as the suspected redlined area.
  • if there are any denied non-minority residents from the area that were treated less favorably
  • if denied or incomplete application data reflects the bank discouraging applicants from that area from applying.
186
Q

how can examiners use third parties to support redlining findings? (4)

A

Interview third parties that may have extensive experience dealing with the applicants in the redlined area to learn if they have any experience with the following:

  • overt statements by the bank that applications from the area are discouraged
  • if the bank treated applicants from the area according to their procedures and/or treated them similarly to non-minority areas.
  • unusual delays or irregularities in loan processing in the area
  • differences in pricing, loan conditions, property valuation in the area compared to other areas.
187
Q

How can examiners use marketing by the bank to support redlining findings?

A

-review materials that show how the bank has marketed in the suspected redlined area and in non-minority areas.

188
Q

Can market share analysis or other comparisons to competitors prove a bank engaged in illegal redlining?

A

No these comparisons are insufficient by themselves to prove redlining.

Similarly a bank cannot justify its own failure to market or lend in an area by citing other bank’s failure to lend in the same area.

189
Q

How can examiners use peer performance to support redlining findings?

A
  • Develop a list of the bank’s competitors
  • learn the level of lending in the suspected redlining area by competitors

A bank’s inactivity in an area where competitors are active supports the idea that the bank avoids doing business there.

190
Q

What is an institution’s record and how can it be used to support redlining findings?

A

Examiners can request the bank for info about its overall record of serving the prohibited basis group with the same character as the redlined area.

This will reveal the bank’s intend to serve that group, which may contradict any findings of discrimination.

191
Q

What steps should be taken when conducting a marketing analysis for a focal point? (3)

A
  • identify the bank’s marketing initiatives
  • determine if marketing efforts are significantly lower in minority areas.
  • Document any identified disparities in marketing and get bank responses.
192
Q

When identifying a bank’s marketing initiatives, what should examiners look for? (5)

A
  • Pre approved solicitations
  • Media Usage
  • Self-produced promotional materials
  • realtors, brokers, contractors, or other intermediaries
  • telemarketers or predictive dialer programs.
193
Q

When reviewing a bank’s pre-approved solicitations, what should examiners look for? (2)

A

-Determine if the bank sends them for Home purchase loans, home improvement loans, or refinances.

  • Determine how the bank selects recipients for solicitations:
  • -criteria for selections
  • -guidance and info provided to credit agencies that supply lists for such solicitations.
194
Q

When reviewing a bank’s media usage, what should examiners look for? (5)

A
  • Determine in which newspapers/media the bank advertises and if the media focuses on a specific prohibited basis or geographic area
  • Learn bank strategies for geographic and demographic distribution of media
  • review copies of the media
  • determine criteria/info provided to media about what is an attractive customer or attractive area for business.
  • determine if advertising is the same across non-minority areas as minority areas
195
Q

When reviewing the bank’s self-produced promotional materials, what should examiners look for? (2)

A
  • how the bank distributes the materials (method and areas)

- Learn what the bank thinks their target audience is.

196
Q

When reviewing the bank’s relationships with realtors, brokers, contractors, and other intermediaries, what should examiners look for? (6)

A
  • determine if the bank uses them to solicit business
  • learn how the bank decides which intermediaries it will solicit
  • identify solicited parties and determine distribution between minority and non-minority areas
  • review information distributed to intermediaries
  • how often the bank contacts intermediaries
  • what criteria bank communicates to intermediaries about the type of customer or geographic areas it seeks for business.
197
Q

When reviewing the bank’s telemarketing or predictive dialing programs, what should examiners look for?

A

learn how the bank identifies which customers to contacts and if the bank sets any parameters on how the list of customers is created.

198
Q

When obtaining and evaluating responses from a bank and concluding the exam, what steps should examiners take? (5)

A
  • Present findings to bank management if present
  • document ALL findings provided by the bank
  • evaluate if responses are consistent with previous statements, bank policy/ procedures, bank documents, and reasonable banking practices.
  • if you conclude the bank failed to justify findings on a legal or nondiscriminatory basis, prepare violations and report
  • Consult with supervisors if violation should be referred to another agency or an enforcement action should be undertaken.
199
Q

What findings warrant explanations from bank management? (7)

A
  • Overt evidence of disparate treatment
  • Instances of apparent disparate treatment in underwriting or pricing
  • apparent disparate treatment in steering, redlining, or marketing policies/practices.
  • instances where a denied prohibited basis applicant was not afforded the same level of assistance as an approved control group applicant who was not better qualified
  • instances where a prohibited basis group applicant received less favorable treatment than was customary by bank policy
  • statistically significant average differences in frequency or amount of pricing disparities between control and target group applicants
  • evidence of neutral policies/procedures, practices that appear to have a disparate impact on a prohibited basis.
200
Q

When documenting bank responses to potential violations, what should examiners include? (3)

A
  • All responses, not just the “best” or “final” response.
  • Document each discussion with dates, names, titles, questions, responses.
  • Any information that supports or undercuts the bank’s credibility or bears on the issues raised by the discussions.
201
Q

How should examiners evaluate if a bank’s responses are consistent across previous responses, practices, policies/procedures, and reasonable banking practices. (2)

A
  • don’t assume the bank had specific intentions or considerations in mind when they took the actions being evaluated. (ex: don’t conclude that bc you noticed a legitimate reason for denial, that no discrimination occurred, unless its clear the bank actually based the denial on that reason at the time of denial.)
  • Perform follow-up file reviews as necessary to determine accuracy and credibility of explanations.
202
Q

Is the prohibited basis characteristic “marital status” applicable to same sex marriage?

A

yes

203
Q

Does the prohibited basis characteristic “sex” applicable to sexual orientation and gender identity?

A

Yes

204
Q

Is the following scenario a fair lending concern?

Evaluating creditworthiness of an applicant and co-signer (not co-applicant) separately, while evaluating married co-applicants based on combined qualifications.

A

No:

Creditors may evaluate a co-signer’s qualifications separately from the applicant. A co-signer is generally called upon to repay a loan when the primary borrower is not able to make the payments; therefore, creditors may consider their financial capacity independently from the applicant. For instance, a bank may calculate separate debt-to-income ratios. This is a different structure from a loan involving two or more co-applicants where all would have primary responsibility for repayment. HOWEVER, A bank that required unmarried co-applicants to qualify separately, while allowing married co-applicants to qualify jointly, would have a discriminatory policy based on marital status.​

205
Q

What type of fair lending concern does the following scenario present?

Bank requiring a lower LTV (higher down payment needed) for areas with a population of less than 10,000 and higher LTV requirements for other areas.

A

This could present a disparate impact concern

206
Q

Is this a violation?

Bank charging joint applicants for each individual credit report, and only charging one credit report fee for married applicants.

If so, does it require a consultation?

What type of corrective action is appropriate?

A

Yes

A consultation is not required because credit report fee violations based on marital status are not considered a pattern or practice of discouraging applicants and do not require a referral to the DOJ, a 15 day letter is also not required

Bank should cease the practice immediately, conduct a file review of loans originated since LX, reimburse effected customers, and make changes to policies procedures and provide training.

207
Q

If a credit scoring system does not include age, does it have to meet the empirically derived, demonstrably and statistically sound standard?

A

No

A credit scoring system that does not meet this standard is considered a judgmental system. The use of a judgmental system for evaluating applicants is not considered a violation of Regulation B unless it directly considers a prohibited basis as a factor.

208
Q

Can a bank require that depositors or borrowers be citizens or permanent resident aliens?

Can a bank require that prospective borrowers and depositors provide proof of their status?

A

Yes a bank can inquire about permanent residency under ECOA.

a denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin.

However, a creditor must fairly and neutrally consider these factors without regard to any prohibited basis. For example, a bank would violate ECOA if it only asked for proof of citizenship or resident status if the applicant had a Hispanic surname.

209
Q

Does ECOA/Reg B apply to pre-application marketing?

Does it apply to prescreened credit solicitations?

A

Yes, Pre-application marketing is covered by the discouragement provision. Here are three examples or prohibited practices:

  • statement that the applicant should not bother to apply after stating the applicant is retired
  • the use of communication in advertising that implies or suggests discriminatory preference or policy of exclusion
  • use of interview scripts that discourage applicants on a prohibited basis

No, Pre-screened solicitations are not covered by the rule. But FHA, with regard to residential credit, covers pre-application marketing more broadly including prescreened credit solicitations.

210
Q

Is this a violation?

Loan policy prohibits making mortgages to applicants who are seeking homes in a faith-based community where the title to the collateral property includes a faith-based restrictive covenant. Bank asserts that the title restriction would make it difficult to sell in the event of foreclosure.

A

This is a violation of FHA and ECOA.

  • the bank cannot treat applicants requesting this type of loan differently than any other applicants
  • faith-based covenants are legally unenforceable and are unlikely to impact if the bank needed to sell
  • a broad ban on lending to members of a religious community would not be the least discriminatory alternative to the bank.
211
Q

Are there discrimination risks posed by deposit activities?

For example, can we cite a violation if a bank paid higher interest rates on deposit accounts (that have no credit feature) on a prohibited basis?

A

ECOA would not apply if the deposit account does not contain a credit feature. However the Civil rights act could apply to non credit transactions (Section 1981) and could cover such discrimination.

A violation could be cited in the ROE and perhaps lead to an enforcement action, but would need careful legal analysis.

212
Q

A bank offers an overdraft line of credit limit of $200 for all deposit accounts except for its Senior Account, which allows $300 in overdraft protection for people age 50 and above.

Would this be overt discrimination?

A

Yes. Under Regulation B (12 CFR 1002.4(a)), a creditor cannot treat borrowers differently based on age (provided that the applicant has the capacity to enter into a binding contract).

One exception to this is that credit programs may treat borrowers age 62 or older more favorably than younger borrowers. (See Official Interpretation 12 CFR 1002.6(b)(2)). Therefore, a deposit account that allows a higher overdraft program limit for customers age 50 or above is overtly discriminatory, in that it allows preferential treatment to borrowers age 50-61, as compared to borrowers younger than 50.

213
Q

May a bank have a policy that all applicants must be at least 21 years of age to qualify for a credit card?

A

No. A bank may not have a policy that applicants must be at least 21 years of age to qualify for credit. While Regulation Z (1026.51(b)) imposes requirements when opening a credit card account under an open-end (not home-secured) consumer credit plan for a consumer less than 21 years, lenders cannot avoid following those requirements by not offering credit to applicants under 21. A policy requiring applicants to be at least 21 would violate Regulation B’s prohibition against discriminating on the basis of age.​

214
Q

Is it a fair lending concern if a bank does not accept co-signers, co-borrowers, or guarantors?

A

Yes. While there is no requirement that banks offer applicants the option of having co-borrowers, co-signers, or guarantors, having a policy against them could have a disparate impact on younger applicants. Younger applicants may be more likely to require such additional support due to lack of credit and job history. ​

215
Q

Does ECOA apply to overdrafts?

A

Yes, overdrafts are considered credit under TILA.

216
Q

What is the definition/examples of a public assistance program under ECOA?

A

Any federal, state, or local governmental assistance program that provides a continuing, periodic income supplement, whether premised on entitlement or need.

The commentary goes on to list Temporary Aid to Needy Families, food stamps, rent and mortgage supplement or assistance programs, Social Security and Supplemental Security Income, and unemployment compensation as examples of public assistance, but indicates that the list is not meant to be exclusive.

Medicare and Medicaid are considered public assistance for doctors and hospitals and others to whom the benefits are payable.

217
Q

If a consumer makes a claim of discrimination on the basis of handicap with regard to a residential real estate-related transaction, does the complainant need to clarify how s/he meets the definition of “handicapped” under the law?

A

Yes. Just as a person would need to identify their race or age if a discrimination claim was made on the prohibited basis of race or age, a consumer who makes a claim of discrimination based on handicap must show how they meet the definition of handicap.​

Fair Lending (5 decks)

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