By John Flynn, CEO, Open Lending
Even though credit unions overall attempt to run their businesses in the best interests of all their members, the federal regulators that oversee lenders have seen fit to apply laws and regulations to ensure consumers are treated fairly and equitably. Often these requirements come about after missteps by financial services providers.
In the past – and unfortunately a few unscrupulous ones currently – financial institutions and others have discriminated against consumers based on race, gender and myriad other factors unrelated to their ability to responsibly manage credit and finances. As we head into prime lending season, particularly for auto loans, we wanted to provide a brief primer to help credit unions ensure they remain on the right side of history, justice and the law.
The Equal Credit Opportunity Act, the Fair Housing Act and the Home Mortgage Disclosure Act work together to prohibit discrimination in any aspect of credit transactions, including businesses and consumers, based on race or color, religion, national origin, sex, marital status, age, (provided the applicant has the capacity to contract), income from public assistance programs, or an applicant’s good faith exercise of any right under the Consumer Credit Protection Act. The FHA also includes nondiscrimination based on handicap or familial status, defined as having children under the age of 18 living with a parent or legal custodian, pregnant women, and people securing custody of children younger than 18. Mortgage lenders cannot discriminate based on any of the factors in either list, under the FHA. It includes co-applicants or other associations, too.
The ECOA is implemented under Regulation B, found at 12 CFR part 1002, which describes lending acts and practices that are specifically prohibited, permitted or required. Official staff interpretations of the regulation are found in Supplement I to 12 CFR part 1002. Every aspect of the process for the applicant is covered, including information requirements, investigation procedures, standards of creditworthiness, terms of credit, furnishing of credit information, revocation, alteration, or termination of credit, and collection procedures. Additionally, Reg B requires credit unions to:
· Notify applicants of the credit decision within 30 days of receiving a completed application.
· Retain records of credit applications for 25 months after notifying the member of its credit decision.
· Collect information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans.
· Provide applicants with copies of appraisal reports used in connection with credit transactions.
The FHA, which is primarily enforced by the Department of Housing and Urban development, specifically applies to discrimination regarding all aspects of residential real estate-related transactions. That means purchase loans, improvement loans and loans extended for the purchase of building a home, as well as purchasing real estate loans; selling, brokering or appraising residential real estate; or selling or renting a dwelling. Under both ECOA and FHA, it is unlawful for a lender to discriminate in any piece of a real estate transaction, more specifically, they must not:
Fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards
Discourage or selectively encourage applicants with respect to inquiries about or applications for credit
Refuse to extend credit or use different standards in determining whether to extend credit
Vary the terms of credit offered, including the amount, interest rate, duration, or type of loan
Use different standards to evaluate collateral
Treat a borrower differently in servicing a loan or invoking default remedies
Use different standards for pooling or packaging a loan in the secondary market.
A lender may not express, orally or in writing, a preference based on prohibited factors or indicate that it will treat applicants differently on a prohibited basis. A violation may still exist even if a lender treated applicants equally.
A lender may not discriminate on a prohibited basis because of the characteristics of:
An applicant, prospective applicant, or borrower
A person associated with an applicant, prospective applicant, or borrower (for example, a co-applicant, spouse, business partner, or live-in aide)
The present or prospective occupants of either the property to be financed or the characteristics of the neighborhood or other area where property to be financed is located.
HUD’s FHA regs are located at 24 CFR Parts 100, 103, and 110, and guidance on discriminatory advertising practices is located on the HUD’s website. Federal credit unions must also comply with NCUA Rules and Regulations Section 701.31, 12 CFR Section 701.31, relating to issues specific to credit unions, such as field of membership.
The NCUA’s guide to fair lending, also has a check list for FHA compliance on page 37, here.
Finally, the NCUA implemented a fair lending exam in 1999 that coverage all federally insured credit union with fewer than $10 billion in assets; those with more than $10 billion in assets fall under the Consumer Financial Protection Bureau. Through the program, the NCUA enforces ECOA and Regulation B in federal credit unions and the Home Mortgage Disclosure Act (Reg C) and for all federally insured credit unions. HMDA requires all financial institutions, including credit unions larger than $46 million in assets that make mortgage-related loans, among other requirements, to collect and disclose data on home purchase loans, improvement loans and refinancings (originated or purchased). The 2019 HMDA collection requirements are located here.
If the NCUA identifies a violation, it is reported to HUD or the Department of Justice under procedures established by the Federal Financial Institutions Examination Council Interagency Fair Lending Examination Procedures. The NCUA provides a HMDA checklist on pages 48-50 here.
The regulators over lenders don’t mess around with fair lending violations, because serious reputational and strategic risks are at stake for the industry. Violations can include administrative sanctions such as fines for repeated failures, so it’s always best to maintain tip-top compliance policies and procedures.
All of this reporting and compliance may be a pain, but it’s also good business and can open up opportunities for lenders when strategic insights are gained. OpenLending can create possibilities for your financial institution, too. Learn more here.