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Fair Lending Enforcement Is Heating Up: Avoid These 3 Mistakes

4 min read
Aug 12, 2020

It’s been a busy summer for lending compliance enforcement. Both the Consumer Financial Protection Bureau (CFPB) and the Justice Department have been cracking down on Fair Lending and deceptive loan marketing.

What kind of actions are drawing scrutiny? Here are three examples and how to make sure you avoid them.

Redlining Mortgage Lender Disparages African-American Neighborhoods
Bank of America Sued by Justice for Discriminatory Policies
Mortgage Companies Fined $1 Million for Misleading Service Members


Redlining Mortgage Lender Disparages African-American Neighborhoods

The CFPB filed a lawsuit against a Chicago mortgage company that failed to draw mortgage applications from African-American neighborhoods in its market. The CFPB used statistical analysis to make its case and show the mortgage company had “no legitimate, non-discriminatory reason to draw relatively few applications for mortgage loans for properties in these African-American areas.” The CFPB says the company violated the Equal Credit Opportunity Act (ECOA) and the Consumer Financial Protection Act of 2010.

How prevalent were the differences? Only 1.8 percent of the company’s mortgage applicants were African-Americans compared to 9.8 percent at other mortgage lenders. Meanwhile, the handful of applications they processed for properties in African-American neighborhoods were mainly from non-Hispanic white applicants.

The CFPB blamed the company’s infomercial radio show.  The program was hosted by the company’s owner and several loan officers. The lawsuit says the company’s owner and loan staff made a variety of disparaging statements about African-American neighborhoods. CFBP felt that the comments illegally discouraged African-Americans from applying for mortgages.

A sample of comments that caught the attention of the CFPB, that were taken from the company’s call-in radio show between 2014 and 2017 include:

  • Referring to Chicago’s South Side, a predominantly black neighborhood, as “hoodlum weekend,” and saying that “walking through the South Side at 3:00 AM [would] get the same rush” as sky diving.
  • When a caller from a city that is 80 percent African-American asked about how to improve credit scores, the company’s president remarked that the caller’s wife is “a woman and she probably doesn’t have good credit because she’s a woman,” and that “[you’ve] got to keep those women in line over there in Markham.” He went on to say, “You drive very fast through Markham, and you don’t look at anybody or lock in on anybody’s eyes in Markham . . . . You look at your dashboard, you don’t lock in on anybody.”
  • Discussing a downtown grocery store, they said: “We used to call it Jungle Jewel. There were people from all over the world going into that Jewel. It was packed. It was a scary place.” They also joked about taking down a Confederate flag when getting a home ready for sale.

The company did not have any marketing initiatives aimed at African-Americans and none of its 17 loan officers were African-American.

Takeaway: Publicly disparaging the communities your financial institution serves using advertising paid for by the financial institution is not a smart move. When your company's leadership and employees make disparaging comments about a community or those who live there, it will be seen as discouraging those residents from working with your institution.

Not only that, but it invites scrutiny because regulators know where there is smoke, there is likely fire. It’s possible that it was those comments (or complaints about those comments) that encouraged the CFPB to look at the mortgage company’s lending to minority communities in the first place. Additionally, those comments clearly indicate leadership and lending employees do not treat similarly situated individuals the same, and has a pattern or practice of treating and viewing people differently.

Related: How to Build a Strong Fair Lending & Redlining Compliance Management System

Bank of America Sued by Justice for Discriminatory Policies

According to a civil complaint, Bank of America is in trouble with the Justice Department for allegedly denying mortgage loans and home equity loans to adults with disabilities who were under legal guardianship or conservatorships, This was a policy in place between 2010 and 2016.

The proposed settlement would require BofA to:

  • Pay $300,000 in compensation to victims,
  • Develop a new, nondiscriminatory underwriting policy,
  • Train employees on the new policy,
  • Monitor loan processing and underwriting for Fair Housing Act compliance, and
  • Report on complaints on loan denials for applicants under guardianship or conservatorships.

Takeaway: While it’s important to have written policies and procedures, those policies and procedures need to be compliant with all applicable lending laws. When developing rules for specific communities or groups, make sure they aren’t discriminatory.

Mortgage Companies Fined $1 Million for Misleading Service Members

Two California mortgage companies will be paying combined civil money penalties of over $1 million after the CFPB issued a consent order for mailing U.S. military service members ads for VA-guaranteed mortgages. The ads contained false, misleading, and inaccurate statements, the CFPB says. Additionally, they lacked required disclosures, in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts and practices, the Mortgage Acts and Practices – Advertising Rule (MAP Rule), and Regulation Z.

One company made false claims about consumers’ existing loans, implying the problem could be solved with a loan from the mortgage company. Both companies’ ads failed to properly disclose credit terms and one implied property assessments were included in payment estimates, the CFPB says.

In addition to penalties, the mortgage companies will need to improve compliance requirements and have someone review all marketing ads for adherence to compliance laws and regulations.

The CFPB stated the consent order is part of an ongoing investigation that “reflects the Bureau’s commitment to enforcing the laws that ensure the financial marketplace is fair and accurate for all consumers.”

Takeaway: Make sure your policies, procedures and campaigns for advertising include a compliance review of materials prior to implementation. It may be an extra step and hassle when compliance requires due diligence reviews and changes to materials, but it’s better to deal with your compliance officer than incur the wrath and potential CMPs from the regulators.

Court Requires CFPB Update of UDAAP Exam Manual

There is no excuse for being caught off guard for Fair lending and lending compliance violations. Lending compliance should be an important element of your compliance management system (CMS). Internal controls like Fair Lending Analysis can help you identify trends early on so you can investigate the root cause and proactively make corrections which can lead to better practices.

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