$2m Fair Lending Bias Settlement - Loan Policies & Disparate Impact
One of the most passionate debates that currently exists within regulatory compliance involves Disparate Impact theory. Before reviewing Luther Burbank Savings settlement with the Department of Justice, allow us to provide a little background on the subject:
- Disparate impact is a legal theory of liability that prohibits an institution from using a facially neutral policy or practice that has an unjustified adverse impact on members of a protected class. A facially neutral policy is one that does not appear to be discriminatory on its face; rather is is one that is discriminatory in its application or effect.
- The courts have recognized three methods of proof of lending discrimination under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA):
- Overt Evidence of Disparate Treatment - when a lender openly discriminates on a prohibited basis.
- Comparative Evidence of Disparate Treatment - when a lender treats a credit applicant differently on the basis of one of the prohibited basis.
- Evidence of Disparate Impact - a disparate impact occurs when a lender applies a racially neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis.
- The Fair Housing Act prohibits discrimination in residential real estate-related transactions based on: race/color, national origin, religion, sex, familial status, and handicap. The Equal Credit Opportunity Act prohibits discrimination in credit transactions based on race/color, national origin, religion, sex, marital status, age, applicant's receipt of income from a public assistance program, applicant's exercise of any right under the Consumer Protection Act.
- More specifically, the Interagency Fair Lending Exam Procedures: "When a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a "disparate impact." The example that is offered is as follows: "A lender's policy is not to extend loans for single family residences for less than $60,0000.00. This policy has been in effect for ten years. This minimum loan amount policy is shown to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live."
- The Interagency Fair Lending Exam Procedures Continue: "The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. When an Agency finds that a lender's policy or practice has a disparate impact, the next step is to seek to determine whether the policy or practice is justified by "business necessity." Finally, evidence of discriminatory intent is not necessary to establish that a lender's adoption or implementation of a policy or practice that has a disparate impact is in violation of the FHAct or ECOA."
Disparate Impact Controversy:
Fair Lending regulatory compliance can be complex because there are numerous laws that contribute to the aggregated compliance approach. While there are many moving parts, the single most controversial element to Fair Lending compliance is Disparate Impact Discrimination Theory. The "discriminatory intent" usually attracts the most passionate dialogue.
In April of this year, the CFPB declared that it will "use all available legal avenues, including disparate impact, to pursue lenders whose practices discriminate against consumers." This was reinforced through a compliance bulletin that stated "the CFPB reaffirms that the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and eforcement authority to enforce compliance with ECOA and Reg B."
In comparison, the American Bankers Association (ABA) formally made its position known through a press release in July, 2012 urging "federal agencies to stop using disparate impact" in fair lending cases as its use is based on unsupported legal theory. The ABA suggests that the courts give the issue more careful consideration and suggests that the regulatory bodies claims of discrimination include a showing of intent to discriminate.
Luther Burbank Savings Settlement:
Last last week the DOJ announced a new settlement involving Disparate Impact. Luther Burbank Savings, a Santa Rosa, CA $3.7 billion thrift, agreed to spend $2 million to settle a federal government lawsuit. According to the statement released by the Department of Justice, the settlement resolves allegations that the Luther Burbank Savings engaged in a pattern or practice of discrimination on the basis of race on national origin (from 2006 through 2010).
The primary allegations inside the complaint brought by the United States included:
- Policy: $400,000 Minimum Loan Amount Policy is claimed to have had a disparate impact on the basis of race and national origin. The policy was continued more than a year (until June 2011) after its regulator identified the policy or practice as potentially discriminatory.
- Disparity through Statistical Analysis through Comparative Analysis, Census Tracts Reviews & Peer Comparisons: The complaint states that in California, Luther originated 4.9% of its single-family residiential mortgage loans in majority-minority census tracts while other lenders with similar volumes of residential loans originated 38.7% of their loans in majority-minority census tracts. The complaint further alleges only 5.5% of Luther's single family residential mortgage loans were made to African-American and Hispanic Borrowers in California while other similar lenders originated 30.4% of single-family residential mortgage loans to African-American or Hispanic borrowers.
Under the settlement, Luther will invest $1.1 million in a special financing program to increase residential mortgage credit that the bank extends to qualified borrowers seeking loans of $400,000 or less in California. In addition, the bank will invest $450,000 in partnerships with community-based organizations; spend $300,000 for outreach to potential customers; and spend $150,000 on consumer education programs; and conduct fair lending training for employees. It was also acknowledged that the bank pledged not to reinstate the $400,000 minimum (note: they have been using $200,000 since June, 2011).
The DOJ commended Burbank Savings for revising its policies and working to resolve the case. Luther Burbank Savings did not admit wrongdoing and settled the lawsuit to avoid long and costly litigation.
Many continue to believe that the US Supreme Court will address the disparate impact theory in the near future (with no clearly defined timeline). In the meantime, all sides recommend lenders continue to comply with all the existing fair lending laws and regulations.
Ncontracts Partners helps banks manage and improve their Fair Lending, HMDA, and CRA compliance programs more efficiently and with less risk. Contact us today. We're here to help!
Want to Learn More?
Justice Department Settlement Release from September 12, 2012: Click Here
Fair Lending Regulations and Statutes (overview published by the Fed): Click Here
Interagency Fair Lending Examination Procedures: Click Here
Consumer Financial Protection Bureau - Compliance Bulletin from April 18, 2012 regarding Lending Discrimination: Click Here
Consumer Financial Protection Bureau - Press Release from April 18, 2012 Regarding Disparate Impact: Click Here
ABA Press Release on Disparate Impact from July 19, 2012 regarding Disparate Impact (urging federal agencies to stop using disparate impact): Click Here
ABA White Paper on Fair Lending and Disparate Impact from July 18, 2012 - "A Theory Without Statutory Basis": Click Here
Ncontracts helps banks manage and improve their Fair Lending, HMDA, and CRA compliance programs more efficiently and with less risk. Contact us today. We're here to help! Visit our website.