Two Ways Fair Lending Missteps Come Back to Haunt You
People like to say “the past is in the past,” but when it comes to fair lending violations, there’s no such thing as the past. Actions from 5-10 years ago can come back to haunt your institution.
The latest example comes from a Texas-based bank in settlement talks with the Justice Department (DOJ) for alleged violations of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) between 2013 and 2017.
In July 2021, the bank received a letter from the DOJ alleging the bank’s housing-related lending practices violated these laws and that the violations could result in civil money penalties (CMP)s as part of the DOJ lawsuit. A ProPublica report from July 2020 suggested that the bank had been discriminating against minority borrowers. The bank denies any wrongdoing in its lending practices.
What are the takeaways from this story?
1. Strong lending compliance today will help you tomorrow. Even if you’ve changed the way you operate, it’s possible for past fair lending violations to become a regulatory or legal issue in the present. The best way to avoid this problem is with a good lending compliance management system to prevent and detect discrimination.
That includes policies, procedures, and processes with fair lending analytics to detect potential loan disparities and the specific loans that are causing them. It gives FIs the opportunity to uncover and diagnose fair lending problems, so they can proactively make adjustments to underwriting and risk controls. If disparities can be caught and corrected early, financial institutions can hopefully prevent a widespread issue.
2. Compliance and legal action can potentially threaten a merger or acquisition. The bank in question has plans to merge with a larger bank. While the acquiring bank supports entering discussions with the DOJ, the regulatory filing that disclosed the letter says it’s possible that any potential litigation or settlement could terminate or delay a planned merger with a larger institution.
Getting regulatory approval can take a long time, and regulators can deny a merger if there are concerns over compliance. Meanwhile, an acquiring institution can walk away from a potential merger if it thinks it will be inheriting an expensive or complicated compliance situation.
If your FI is looking at a merger or acquisition, you’ll want to be able to demonstrate a strong record of compliance, including fair lending compliance.
Is your institution analyzing its loan portfolio for fair lending disparities? If not, now is the time to start—otherwise, you may regret it down the road.