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Fair Lending Legal Foundations
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Fair Lending Legal Foundations
Statutory Sources of Fair Lending Law
1
Discrimination Under ECOA and FHA
6
Investigations, Referrals and Enforcement
13
2
Glossary
1994 Policy Statement on Discrimination in Lending Signed by 10 Federal government regulatory and
enforcement agencies to provide their guidance to consider in determining if lending discrimination
exists and to provide a foundation for future interpretations and rulemakings by the agencies. It applies
to all lenders and any person who extends credit of any type.
Community Reinvestment Act (CRA) The law requiring the Federal banking agencies to evaluate a
bank’s record of helping to meet the credit needs of its entire community, consistent with safe and
sound operations.
Consent Order A final, binding judicial decree or judgment memorializing a voluntary agreement
between parties to a lawsuit in return for withdrawal or end to a civil litigation. Also referred to as a
consent decree.
Credit Transaction Every aspect of an applicant’s dealings with a bank regarding an application for
credit or an existing extension of credit.
Discrimination To treat an applicant less favorably than other applicants on a prohibited basis in any
aspect of a credit transaction.
Discouragement An oral or written statement, in advertising or otherwise, to applicants or prospective
applicants on a prohibited basis that would discourage a reasonable person from making or pursuing an
application for credit.
Equal Credit Opportunity Act (ECOA) The law that promotes the availability of credit to all creditworthy
applicants.
Fair Housing Act (FHA) The law that prohibits discrimination both in residential real estate-related
transactions and in the terms or conditions of the sale or rental of a dwelling.
Home Mortgage Disclosure Act (HMDA) The law that requires institutions to collect and report housing
application and origination data.
Marital Status The state of being unmarried, married or separated as defined by applicable state law.
The term unmarried includes persons who are single, divorced or widowed.
Monitored Data The ethnicity, race and sex data requested by the government in Regulations B and C
for certain real estate related-transactions. Also referred to as “government monitoring information.”
Prohibited Basis A personal or other characteristic that banks cannot use to treat applicants differently
in the credit product life cycle. FHA and ECOA each have a list of prohibited bases, which can be found
on page three of this tool.
Public File A bank file containing information regarding its CRA performance available to the public.
Regulation B The regulation that implements ECOA.
Regulation C The regulation that implements HMDA.
Similarly Situated Describes applicants, borrowers or accountholders who are similarly qualified for a
credit product considering the bank’s documented guidelines.
Tolling Agreement An agreement executed between the bank and the Justice Department allowing the
Justice Department to continue settlement negotiations for Regulation B or ECOA violations beyond the
statute of limitations delineated in ECOA. Usually it means the bank agrees not to destroy any records
pertinent to the negotiations even though the 25-month record retention requirement will be exceeded.
Statutory Sources
of Fair Lending Law
The foundation for fair lending legal obligations is based on two federal
statutes that specifically prohibit discrimination in lending:
• Equal Credit Opportunity Act (ECOA)
• Fair Housing Act (FHA)
These were both recognized in the 1994 Interagency Statement on
Discrimination in Lending, which was signed by 10 government regulatory and
enforcement agencies.
ECOA and Regulation B—A Brief Summary
Enacted in 1974, ECOA prohibits a creditor from discriminating against an
applicant on a prohibited basis during any aspect of a credit transaction.
ECOA applies to secured and unsecured credit, including mortgage loans,
auto loans, secured loans or lines of credit, credit cards, unsecured loans or
lines of credit and business or commercial loans. ECOA prohibits lending
discrimination on any of the following bases:
• Race
• Color
• Religion
• National origin
• Sex
• Marital status
ECOA applies to all
types of secured
and unsecured
loans, including
mortgage loans, auto
loans, credit lines,
credit cards and
commercial loans.
• Age
• Receipt of public assistance
• Exercise of rights under the Consumer Credit
Protection Act
The rules created to implement ECOA are currently contained in Regulation
B. Until recently, rulemaking authority for ECOA belonged to the Federal
Reserve Board. However, the Dodd-Frank Act (Dodd-Frank) transferred
rulemaking authority to the Consumer Financial Protection Bureau
(Bureau) in July 2011. Regulation B further clarifies the prohibitions under
ECOA and provides additional technical requirements for creditors not
Tool 2: Fair Lending Legal Foundations
| 1
covered expressly by ECOA. Some of the technical requirements from
Regulation B are discussed further below. Additional information and
guidance on the requirements under ECOA and Regulation B can be found
in the following documents:
• Federal Reserve Board Official Staff Commentary on
Regulation B;
• 1994 Interagency Statement on Discrimination in
Lending; and
• 2009 Interagency Fair Lending Examination Procedures.
FHA—A Brief Summary
Enacted in 1968 as Title VIII of the Civil Rights Act of 1968, FHA prohibits
discrimination on a prohibited basis both in residential real estate-related
transactions and in the terms or conditions of the sale or rental of a
dwelling. A residential real estate-related transaction includes making or
purchasing a loan that is secured by residential real estate or a loan that
is used to purchase, construct, improve, repair or maintain a dwelling.
Therefore, FHA applies both to loans with a home-based purpose and to
loans where real estate is taken as collateral. However, FHA does not apply to
transactions involving commercial real estate. FHA prohibits discrimination
on any of the following bases:
• Race
FHA applies both to
loans with a homebased purpose and to
loans where real estate
is taken as collateral.
However, FHA does not
apply to transactions
involving commercial
real estate.
2 |
• Color
• Religion
• National origin
• Sex
• Familial status
• Handicap
In January 2012, the Department of Housing and Urban Development (HUD)
issued a final rule that protects borrowers on the basis of actual or perceived
sexual orientation and gender identity, and prohibits consideration of
these factors when determining a borrower’s eligibility for FHA-insured
mortgage financing. In addition, banks should be aware that some state
anti-discrimination laws include sexual orientation and other factors as a
protected class.
ABA Toolbox on Fair Lending
Rulemaking authority for FHA belongs to HUD. Notably, Dodd-Frank did not
transfer rulemaking, supervisory or enforcement authority for FHA to the
Bureau. In addition to HUD’s regulations, additional information regarding
FHA can be found in:
• 1994 Interagency Statement on Discrimination in
Lending; and
Rulemaking authority
for FHA belongs to
the Department of
Housing and Urban
Development (HUD).
• 2009 Interagency Fair Lending Examination Procedures.
24 C.F.R. Part 100
Distinctions between ECOA and FHA
While ECOA and FHA both prohibit discrimination in lending, there are
two important distinctions between the two laws. First, FHA is limited to
residential real estate-related transactions or loans secured by residential
real estate, while ECOA covers all extensions of credit, including both
consumer and commercial. Second, Regulation B provides certain technical
requirements that are meant to help further the purpose of ECOA, while
the HUD regulations relating to FHA do not contain similar technical
requirements. Third, while the prohibited bases outlined in ECOA and
FHA have some overlap, the overlap is not exact. Only ECOA includes
marital status, age, receipt of public assistance and the exercise of a person’s
rights under the Consumer Credit Protection Act as prohibited bases, while
only FHA includes familial status and handicap as prohibited bases. See the
chart below.
Race
Color
Religion
National Origin
Sex
Equal Credit
Opportunity Act
Fair Housing
Act
4
4
4
4
4
4
4
4
4
4
4
4
Handicap
Familial Status
Marital Status
Age
Receipt of Public Assistance
Exercise of Rights Under CCPA
4
4
4
4
While marital status
and familial status
may be seen as similar
prohibited bases,
marital status only
accounts for whether
the applicant is single,
married, divorced,
separated or widowed,
while familial status
accounts for whether
the applicant has
children, is pregnant
or has custody of
children. The definition
of “marriage” is
determined by state
law, so banks should
be cognizant that
protections afforded to
consumers on the basis
of marital status could
vary state to state.
Tool 2: Fair Lending Legal Foundations
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While marital status and familial status may be seen as similar prohibited
bases, marital status only accounts for whether the applicant is single,
married, divorced, separated or widowed, while familial status accounts for
whether the applicant has children, is pregnant or has custody of children.
The definition of “marriage” is determined by state law, so banks should be
cognizant that protections afforded to consumers on the basis of marital
status could vary state to state.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) (12 U.S.C, § 2901 et
seq.) was enacted to encourage FDIC-insured depositary institutions to
help meet the credit needs of their entire communities, including low- and
moderate-income (LMI) neighborhoods.
The required contents
of a bank’s public
file are prescribed in
12 CFR 228.43 for
the OCC and 12 CFR
345.43 for the FDIC.
Contents vary based
on several factors,
including bank size.
The federal banking agencies periodically assess a bank’s CRA
performance and assign a rating to each component of their evaluation as
well as an overall rating. The ratings and a detailed description of a bank’s
CRA performance are set forth in a CRA Performance Evaluation, which
is published on the examining agency’s website and must be maintained
by the bank in a public file. Notably, during a CRA examination a bank’s
CRA performance rating can be downgraded when there is evidence of
discriminatory or other illegal credit practices, including violations of FHA
or ECOA.
Fair Lending Implications
CRA is not an anti-discrimination law, does not enumerate a list of
prohibited bases and bestows no enforcement authority on regulators
to prohibit violations. Therefore, prudential regulators and Justice
Department may not assert discrimination under CRA regulatory
provisions when asserting a redlining violation of ECOA or FHA.
4 |
ABA Toolbox on Fair Lending
Home Mortgage Disclosure Act
The Home Mortgage Disclosure Act (HMDA) (12 U.S.C. § 2801 et seq.)
was enacted in 1975 to require banks to collect information regarding a
residential mortgage applicant’s race, national origin and gender. it also
requires banks to report annually to their regulator and to disclose to
the public in aggregate form the number of home loans made annually
and the geographic areas in which they were made categorized by the
applicant’s monitored characteristics. Additional reporting elements were
imposed by Congress in 2004 covering among other items, such as the loan
rate spread and lien status.
Rulemaking authority for implementing HMDA was originally assigned to
the Federal Reserve Board but was transferred to the Bureau under DoddFrank. In addition to transferring rulemaking authority, Dodd-Frank added
additional new HMDA reporting elements, but those will not be required
until the Bureau issues final rules defining the format and manner of
reporting. Enforcement of HMDA reporting requirements is performed by
agency administrative authority and includes the assessment of civil money
penalties for non-compliant data collection and reporting practices.
The current implementing rule for HMDA is Regulation C. Additional
guidance for collecting and reporting HMDA data can be found in A Guide
to HMDA Reporting: Getting It Right! (http://www.ffiec.gov/hmda/guide.htm).
The current
implementing
rule for HMDA
is Regulation C.
Additional guidance
for collecting and
reporting HMDA
data can be found
in A Guide to HMDA
Reporting: Getting
It Right!
http://www.ffiec.gov/
hmda/guide.htm
Fair Lending Implications
HMDA is a loan data collection and reporting statute—not an antidiscrimination statute. The Act nevertheless has significant fair lending
implications because a bank’s HMDA data is made available annually to
the banking regulatory agencies and general public (upon request).
Using a bank’s HMDA data, regulators, consumer advocacy groups and
other third parties can perform regression analyses to identify banks with
potential fair lending issues. Where apparent disparities exist, banks are
exposed to targeted examinations, enforcement actions and private class
action litigation.
Tool 2: Fair Lending Legal Foundations
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Discrimination Under ECOA and FHA
As noted in the Interagency Statement on Discrimination in Lending,
under ECOA and/or FHA, an institution may not, because of a prohibited
factor, do any of the following:
• Fail to provide information or services or provide different
information or services to an applicant during the lending
process;
• Discourage or encourage certain applicants regarding
inquiries about credit or applications for credit;
• Refuse to extend credit or use different standards in
determining whether to extend credit for some applicants;
• Vary the terms of credit offered to some applicants,
including the amount, interest rate, duration or type
of loan;
• Use different standards to evaluate the collateral of certain
applicants;
• Treat a borrower differently in servicing a loan or invoking
default remedies;
• Use different standards for pooling or packaging loans of
a class of borrowers in the secondary market; or
• Indicate that applicants will be treated differently or
express a preference to treat applicants differently on a
prohibited basis.
Types of Lending Discrimination
Over time, enforcement of FHA and ECOA has developed a common basis
for proof of violations of either law. The courts have recognized and the
regulatory agencies have articulated the following three approaches to
proving illegal lending discrimination:
• Overt discrimination
• Disparate treatment
• Disparate impact
6 |
ABA Toolbox on Fair Lending
Overt Discrimination
Overt discrimination is relatively uncommon and occurs when a lender
openly discriminates against an applicant on a prohibited basis. For
example, if a lender offers a credit card with a more favorable credit limit
for applicants over the age of 30, this policy violates the prohibition on
discrimination based on age. Or, if a lender has a specific underwriting
policy that treats married joint applicants differently than unmarried joint
applicants, that policy would constitute overt discrimination on the basis of
marital status.
Overt discrimination occurs even when a lender expresses a discriminatory
preference but does not act on it. An example is a lending officer telling a
potential applicant that the bank does not like to make loans to people of a
certain race, but they must do so in order to comply with fair lending laws.
Simply making this type of statement expresses a discriminatory preference
in violation of FHA and discourages applicants on a prohibited basis in
violation of ECOA and Regulation B.
Overt discrimination
occurs even when
a lender expresses
a discriminatory
preference but does
not act on it.
Overt evidence includes not only explicit statements, but also any
geographical terms used by the institution that would, to a reasonable
person familiar with the community in question, connote a specific racial
or national origin character. For example, if the principal information
conveyed by the phrase “north of 110th Street” is that the indicated area
is principally occupied by Hispanics, then a policy of not making credit
available “north of 110th Street” is overt evidence of potential redlining on
the basis of national origin.
Overt evidence is relatively uncommon. Consequently, a redlining
analysis would usually focus on comparative evidence (similar to analyses
of possible disparate treatment of individual customers) in which the
institution’s treatment of areas with contrasting racial or national origin
characteristics is compared.
Disparate Treatment
Disparate treatment occurs when a lender treats a credit applicant or
borrower differently due to a prohibited basis at any time during any aspect
of the lending process. Typically, disparate treatment exists when similarly
situated applicants receive different treatment on a prohibited basis; the
disfavored applicant, who is as well or better qualified than the favored
applicant, receives less favorable terms or is rejected for a loan when the
favored applicant is granted a loan. The lender does not have to express
a prejudice or a conscious intent to discriminate under the disparate
Tool 2: Fair Lending Legal Foundations
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treatment standard—simply treating people differently on a prohibited
basis without a credible, nondiscriminatory explanation for the different
treatment is sufficient.
Lenders do not
have to express a
prejudice. Disparate
treatment happens
simply by treating
people differently on a
prohibited basis without
a credible explanation
for the difference.
The key is making
sure that each
applicant is treated
equally during the
application process,
the lending decision is
based on a legitimate
credit decisioning
factor, and the basis
for the decision is
documented.
8 |
An example of disparate treatment would be providing Hispanic applicants
additional explanation and assistance with their loan applications, while
providing Asian applicants little or no explanation or assistance with their
applications. The result is Asian applicants applying for fewer loans or the
lender granting fewer loans to Asian applicants because the applications
were less complete than those of the Hispanic applicants who received
assistance. Another example of disparate treatment involves steering
applicants to products with a higher-price, higher-risk or more onerous
terms on a prohibited basis instead of the applicants’ needs.
Lenders should pay particular attention to the treatment of applicants
who are neither clearly well-qualified nor clearly unqualified because there
may be more need for lender discretion and whether or not an applicant
qualifies may depend on the level of assistance and information provided
by the lender. Using different levels of discretion or providing different
levels of assistance to these applicants could raise issues of disparate
treatment if applicants on a prohibited basis are treated differently. While
lenders are under no obligation to provide additional information and
assistance during the application process, if they choose to do so, the
assistance must be provided to everyone in a nondiscriminatory manner.
It is important to note that legitimate differences can exist between
applicants that appear to be similar, and lenders are permitted to make
lending decisions based on those legitimate differences. The key is making
sure that each applicant is treated equally during the application process,
the lending decision is based on a legitimate credit decisioning factor and
the basis for the decision is documented. These practices enable the lender
to show that it used a legitimate business purpose for the decision and did
not act on a prohibited basis.
ABA Toolbox on Fair Lending
Disparate Impact
Disparate impact, sometimes called “effects discrimination,” occurs when a
lender applies a policy or practice equally to all applicants, but the policy
or practice has a disproportionately negative impact on qualified applicants
from a prohibited basis group.
A disparate impact claim must show that the challenged policy or practice
is either not justified by a valid business purpose or that the business
justification could be as effective if achieved by a known less discriminatory
alternative.
Most claims that are alleged to be disparate impact end up as disparate
treatment cases where seemingly neutral rules are actually applied
differently to persons of one group as opposed to another.
Statistics about the impact of particular underwriting or pricing standards
have been commonly used to base a disparate impact case. Unfortunately,
these statistical triggers are often misapplied because they do not identify
a specific criterion at work or are based on comparisons against general
prohibited bases demographics rather than the appropriate set of
“qualified” persons in the protected class. Nevertheless, such statistically
based allegations can cause lenders to spend considerable resources to
rebut the assertion of disparate impact.
Legitimate differences
can exist between
applicants that appear
to be similar. Lenders
can make decisions
based on those
legitimate differences.
While the theory of disparate impact has been raised by both regulators
and plaintiffs, the ongoing viability of disparate impact claims in the fair
lending context is uncertain due to recent case law. In Wal-Mart Stores Inc.
v. Dukes, 131 S. Ct. 2541 (2011), the Supreme Court rejected an attempt
to establish commonality in a class action based on discretionary conduct
and regional disparities in an employment case alleging disparate impact.
While this case involved employment claims, several courts have applied
the case in rejecting similar commonality arguments in fair lending cases.
Tool 2: Fair Lending Legal Foundations
| 9
Overview of Technical Requirements
Under Regulation B
Regulation B imposes technical requirements that are used to further
enhance the purpose of ECOA. The following is a list of some technical
requirements prescribed in Regulation B and a proposed practice pointer
for complying with each requirement.
Individual Credit
Rule:
Individual or sole-name credit must be granted to any creditworthy applicant
without regard to sex, marital status or any other prohibited basis.
Pointer:
Applications for credit should expressly state whether the applicant is seeking
individual or joint credit. In addition, when inputting loan data or when
originating a loan, record the name in which the borrower applied regardless of
whether it is the borrower’s birth-given surname, a married name or a combined
(hyphenated) surname.
Lifestyle Change
10 |
Rule:
A bank that maintains open-end accounts generally may not require re-application,
change the original terms or terminate the account as a result of a customer’s name
change, change in marital status, aging or retirement. An exception can be made if
there is evidence of the borrower’s inability or unwillingness to pay. Re-application
can be required if there is a change in marital status and the creditor had relied on
the income of the borrower’s spouse to repay the loan and the borrower’s income at
the time of the change in marital status would not support the credit line.
Pointer:
When the marital status of a borrower has changed, loan terms or conditions should
be changed only when there is evidence that deterioration in the credit has occurred.
The bank generally cannot require re-application or terminate an account based
on name change, change in marital status, attainment of a certain age or upon
retirement. Exceptions would include evidence of an inability or unwillingness to
pay, a change in marital status if the bank based qualification on the income of the
spouse at the time of original application or an indication by one of the liable parties
that he or she wishes to terminate responsibility for payment on the account.
ABA Toolbox on Fair Lending
Specific Co-Signer or Guarantor Not Required
Rule:
When a creditor determines that a co-signer or guarantor is necessary, a specific
co-signer (e.g., a spouse) cannot be required.
Pointer:
The choice of a co-signer or guarantor must be left to the applicant, subject to
the bank’s approval regarding the strength added to the creditworthiness of the
borrower. However, the bank may require a joint property owner or any person with
an interest in the property (which may include a spouse) to sign any instrument
the bank reasonably believes is necessary under state law to make the property
available to satisfy the debt in the event of default.
Unintended Joint Applicants
Rule:
A joint applicant is someone who voluntarily applies contemporaneously with
the applicant for shared or joint credit, but not someone the creditor requires as
a condition for granting the credit requested. The person’s intent to be a joint
applicant must be shown at the time of application, and signatures or initials on
a credit application affirming the applicant’s intent to apply for joint credit can be
used to establish intent. Simply having someone sign the promissory note is not
sufficient to show intent to be a joint applicant.
Pointer:
Banks should insure that all loan applications contain a field to identify whether
the applicant is applying for individual or joint credit or otherwise have the ability
to capture an applicant’s intent to apply individually or jointly for credit at the time
the application is made. A bank must not represent to an applicant that a loan will
only be granted if it is applied for with a co-applicant. Where an applicant submits
an individual application, banks must evaluate the person’s creditworthiness and
may only require a guarantor if the applicant does not individually qualify.
Reporting to Credit Bureaus
Rule:
Regulation B stipulates that both joint obligors and authorized users of an account
should have the benefit (or burden) of the credit history that relates to the account.
Banks must designate and report credit in the names of both spouses if both are
obligated or permitted to use the account.
Pointer:
Credit files should be indexed to allow for reporting credit histories in the name of
each spouse in the case of joint accounts. Credit information should be reported
to credit reporting agencies in a manner that enables the agencies to report
information in the requested name or in the name of each borrower on an account.
Tool 2: Fair Lending Legal Foundations
| 11
Assumption Regarding Child-bearing
Rule:
When evaluating an applicant’s creditworthiness, a bank cannot make assumptions
or use statistics to predict the likelihood on an applicant bearing or rearing children
or receiving diminished or interrupted income in the future due to bearing or
rearing children.
Pointer:
Banks must evaluate an applicant’s financial condition as of the time of the
application and must not consider any factors relating to the possibility of an
applicant bearing and raising children or experience diminished income due to
child bearing or rearing.
Considering Immigration Status
Rule:
A bank may consider an applicant’s immigration status or status as a permanent
resident of the United States, along with any additional information necessary to
determine the bank’s rights and remedies for repayment.
Pointer: While a bank may consider an applicant’s immigration status, it must not take
the applicant’s race or national origin into account at any point during the lending
process.
Considering Telephone Listing
12 |
Rule:
In evaluating an application, a bank cannot take into account whether an applicant
has a telephone listing. However, a bank may consider whether there is a telephone
in the applicant’s residence.
Pointer:
A bank should not ask if an applicant’s telephone number is listed in the telephone
book or independently research whether an applicant is listed either by referring to
a telephone book or relying on an online telephone number listing service.
ABA Toolbox on Fair Lending
Investigations, Referrals
and Enforcement
Fair Lending Investigations
Prior to the establishment of the Bureau, a bank’s prudential regulator was
primarily responsible for investigating potentially discriminatory activity that
violated ECOA or FHA and referring violations to the Department of Justice
(Justice Department) where applicable. The Bureau now has supervisory
and enforcement authority for ECOA (for banks with $10 billion or more in
total assets) but not FHA. In addition to having enforcement authority for
fair lending violations following a referral by a banking regulatory agency,
the Justice Department and HUD have recently begun conducting parallel
investigations to regulatory investigations based on the same underlying
facts. State attorneys general also have investigation and enforcement
authority, which were further strengthened under Dodd-Frank.
This section focuses on the investigation and enforcement process of the
prudential regulators of banks with less than $10 billion in total assets that
are not subject to the Bureau’s supervision. For more information about
the Bureau’s investigation and enforcement authority, please refer to the
following sources:
For more information
about the Bureau’s
investigation and
enforcement authority,
see Sections 1052 and
1053 of Dodd-Frank
and the Interim Final
Rules issued by the
Bureau. 76 FR 45168
(July 28, 2011)
• Sections 1052 and 1053 of Dodd-Frank
• Interim Final Rules issued by the Bureau. 76 FR 45168
(July 28, 2011)
• Compliance Examination Manual
• Fair Lending Guidance
Investigations by prudential regulators are typically initiated in one
of four ways:
• A regulator discovers potential fair lending issues during a
scheduled compliance examination.
• A regulator runs HMDA data through screens, detects an
outlier bank and then conducts a targeted fair lending
examination of the bank.
Tool 2: Fair Lending Legal Foundations
| 13
• A regulator conducts a targeted fair lending examination
of a bank based on consumer complaints made against the
bank with the regulator, a state attorney general office or a
state licensing authority.
• A regulator identifies a potential fair lending risk by way of
individual or class action litigation alleging discriminatory
activity.
The Justice Department Referral Process
Pattern or Practice?
Isolated, unrelated
or accidental
instances typically
do not constitute a
pattern or practice—
repeated, intentional
or institutionalized
practices do.
If an investigation produces evidence or data that gives a prudential regulator
“reason to believe” that a bank engaged in an individual violation of ECOA,
then the regulator may refer the matter to the Justice Department. If the
evidence or data gives the regulator “reason to believe” that a bank has
engaged in a “pattern or practice of discouraging or denying applications
for credit” in violation of ECOA, then the regulator must refer the matter
to the Justice Department. Isolated, unrelated or accidental instances
typically do not constitute a pattern or practice, while repeated, intentional
or institutionalized practices do. With respect to FHA, all executive agencies
are required by Executive Order Number 12892 to refer a matter to the
Justice Department if evidence indicates “a possible pattern or practice of
discrimination” in violation of the act.
Before referring a fair lending matter to the Justice Department, a bank’s
prudential regulator typically will issue a “15-day letter” to the subject bank
stating that the regulator has made a preliminary decision to refer the matter
and that the bank has 15 days to respond to the determination. In some
cases, a regulator may issue a 30-day letter in lieu of a 15-day letter. A bank
can request an extension of time to respond. In many cases, banks have been
alerted to a regulator’s concerns prior to issuance of a 15-day letter. Once
a regulator affirmatively decides that it must refer a matter to the Justice
Department, the agencies have different procedures for whether the bank
may appeal the decision. For example, the OCC permits banks to appeal
referral decisions to the agency’s ombudsmen while the FDIC expressly
precludes it.
Federal agencies also make referrals to the Justice Department, which
recently provided guidance to the agencies on pattern-or-practice cases. For
a referral to be returned to a bank regulatory agency, the Justice Department
said it will consider the following factors:
14 |
ABA Toolbox on Fair Lending
• Whether the practice had stopped and the likelihood of its
recurrence
• Whether the violation may have been unintentional or the
result of not knowing the regulatory requirements, if the
violation was more technical in nature
• The number of potential victims or amount of harm to any
potential victims
The Justice Department indicated that it would consider pursuing legal
action against lenders under the following circumstances:
• The practice created serious financial or emotional harm
to victims.
• The practice was not likely to stop without litigation.
• Potential victims couldn’t be adequately compensated
without legal action.
• Victims damages were necessary and the legal action
would deter institutions from considering such actions as
simply a cost of doing business.
• The practice was widespread within the industry or raised
important policy issues, requiring legal action to stop the
industry practice.
The Bureau has supervisory and enforcement authority for ECOA
compliance and is, therefore, not required to refer potential ECOA
violations to the Justice Department. However, Dodd-Frank requires the
Bureau to work together with the FTC, HUD and the Justice Department to
coordinate their enforcement activities and promote consistent regulatory
treatment of consumer financial products and services. To that end, the
Bureau must enter into a memorandum of understanding with each
agency that provides for sharing information on the agencies’ fair lending
investigations, screening procedures and investigative techniques.
The Justice
Department may
request additional
information or
documents from
the bank.
In CFPB Bulletin 2011-04, the Bureau stated that it may give notice to
individuals or firms subject to investigation prior to recommending or
commencing enforcement action. If such notice is given, the Bureau stated
that a response would be required in 14 days and be limited to 40 pages. The
Bureau also noted that the response may be discoverable by third parties.
Tool 2: Fair Lending Legal Foundations
| 15
The Justice Department Enforcement Process
Upon referral of a fair lending matter to the Justice Department, the
investigation will be assigned to an attorney in the Civil Rights Division.
If the alleged discrimination involves mortgage lending, there is a special
Housing Section within the division that was formed in 2009 by Attorney
General Eric Holder to handle those fair lending referrals, which have been
a high priority in the current Administration.
The Justice Department may exercise its right to conduct further fact-finding
by requesting additional information or documents from the bank. In many
cases, banks voluntarily submit information, analyses or other evidence
in an affirmative submission that defends the bank’s position. The Justice
Department has the authority to decline further action and refer the matter
back to the regulator. At that point, the regulator may either refrain from
taking further action or pursue an administrative enforcement action under
12 U.S.C. § 1818 such as a non-public memorandum of understanding or
public consent order (cease-and-desist order).
Dodd-Frank extended
the statute of
limitations for the
Justice Department
to five years. This
conflicts with Reg B,
which requires
25 months.
If the Justice Department decides that there is sufficient evidence to file
a civil action in federal district court, it will issue an authorization-to-sue
letter to the bank before filing a complaint. In these letters, the Justice
Department summarizes the allegations and the factual basis for the claims
and typically offers the bank the opportunity to engage in pre-suit settlement
negotiations. It is not unusual for the government to require a bank to
execute a tolling agreement while settlement negotiations are ongoing if the
statute of limitations is in danger of expiring. Notably, Dodd-Frank amended
the statute of limitations provision in ECOA to extend the limitation period
from two to five years. The extended statute of limitations may reduce the
number of tolling agreements the Justice Department seeks. If settlement
negotiations are successful, the parties will enter into a consent order. The
Justice Department will concurrently file a complaint in federal court and
an unopposed motion to entry of the consent order. The consent order will
give the district court jurisdiction over the case for the duration of the order.
Upon satisfactory completion of the conditions of the order, the Justice
Department will move to dismiss the case.
In the event that the Justice Department and bank are unable to reach a
settlement, the Justice Department may file a complaint and litigate the
matter in federal district court.
16 |
ABA Toolbox on Fair Lending
Prospects for Fair Lending Law Development
There are two areas of fair lending law that are being questioned, records
retention and disparate impact. Currently Section 202.12(b) of Regulation
B, requires creditors to maintain certain records from consumer credit
applications for 25 months (12 months for business credit applications). This
is inconsistent with the extended statute of limitations provided for ECOA
under Dodd-Frank. This inconsistency could present challenges for the
Bureau and prudential regulators in conducting investigations. Accordingly,
banks should be prepared for a forthcoming revision to the document
retention rules.
The applicability of the disparate impact theory to ECOA and FHA has
generated much debate and controversy in the banking industry. Banks
should be aware that the law is evolving with respect to the disparate impact
theory. For many years, the Justice Department relied exclusively on the
overt discrimination and disparate treatment theories in prosecuting fair
lending cases. In 2010, the Obama Administration announced that it would
pursue fair lending cases under disparate treatment and disparate impact
theories, and the plaintiff’s bar followed suit by filing disparate impact
claims. HUD issued a proposed regulation in November 2011 defining the
standards for bringing a disparate impact case under FHA. In addition, the
United States Supreme Court issued an opinion in 2011 in the employment
context that made it more difficult for plaintiffs to bring disparate impact
claims.
As of this writing in April 2012, disparate impact analysis is in the news.
The Bureau of Consumer Financial Protection (CFPB) announced it
would be using disparate impact analysis consistent with the established
Supreme Court precedent for defining disparate impact under ECOA. The
Department of Housing and Urban Development (HUD) proposed a rule
for enforcing the FHA by using a disparate impact approach.
Tool 2: Fair Lending Legal Foundations
| 17
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