Is Fair Lending an Issue for "Business banks"

We hear this question often; generally from our clients that consider themselves "business banks" (banks that engage in very little or consumer lending). The theory behind this question is that since there is little consumer activity, the chances that there might be a fair lending is exponentially deceased. The fact is that limited consumer activity can not only raise the risk, in extreme cases it can be the source of a fair lending complaint by regulators!

What' is the Fair Lending Law?

There is no one Fair lending law. When regulator perform a fair lending analysis they are actually looking at the banks' performance under a series of regulations and laws that are collectively referred to as Fair Lending. These rules include but are not limited to the following:

 Regulation B (Equal Credit Opportunity Act);

 Regulation BB (Community Reinvestment Act);

 UDAAP(Unfair Deceptive and Abusive Acts):

Regulation Z(Truth in Lending Act);

The Holden Act (California)

The Fair Lending Review

There are two key issues in a fair lending review;

Disparate treatment of customers and

Disparate impact of a practice on customers

Each of these questions contains its own analysis. Disparate treatment of customers asks the question whether or not the banks is treating similarly situated customers in a different and unfair manner. For example borrower A has a credit score of 800, a DSCR of 1.5 and has collateral that allows for a LTV of 50%. Borrower B has all of the same characteristics. Borrower A is granted credit while borrower B is declined. In this case, examiners will analyze the files if these two applicants side-by-side to determine whether or not Borrower B was illegally or unfairly declined. This not to say that bank must approve all qualified applicants- it simply means that the reasons for declining a loan must be legal and related to business decisions

Disparate impact asks the question whether a business practice or policy has an unfair or outsized impact on a protected group. Consider a bank policy that requires all business loan customers to own a home. While this may generally be seen as a sound (albeit conservative) policy, in a community where home ownership is enjoyed only by men or the level of home ownership of people of color is minimal- the effect of this policy can be be to unfairly exclude a large portion of legally protected borrowers.

Using these two analyses, regulators can and have applied fair lending regulations at business banks. Although fair lending rules are clearly directed at consumer protection the regulatory agencies have recently made it clear that they will apply these laws and rules to the points where commercial and consumer loans intersect

So even if you consider yourself a business bank, we strongly recommend a fair lending assessment. A sound assessment sound include the following:

Policies and procedures

The credit and lending policies and procedures should require a system if secondary review for credit decisions. This system should allow for a periodic analysis of declines versus similarly situated approvals. The Board or it designated committe should be informed on a regular basis of exceptions to policy. In this manner the

Management of the bank can track whether or not policies and procedures are yielding the desired results. One special note exceptions to policy are often allowed for various reasons. As a best practice tracking these exceptions compiles information to protect the bank against claims of disparate treatment.

Credit decisions

There must be a system to that no individual with lending authority has the ability to threat the will of the Board. For example, if a particular loan officer does not believe that women should be in business and therefore refuses to grant loans to women, the end result should be a red flag for the systems that monitor credit decisions.

Advertising

A system should be in place to ensure that advertising does not send unintended messages. For example, many banks use customer testimonials in their ad copy. These ad often present compelling arguments for why customers should use the services of the bank. However these same ads can also present a strong message that unless you look like the people in the ad, you are not wanted as a customer! It is a best practice for the Board to review advertisements to ensure that the message being sent matches the desire of the Board

Community Outreach

Knowing true credit need of the surrounding community is a requirement of the Community Reinvestment Act. It is also excellent business! A critical component of a sound fair lending program is community outreach. Conducting research on the economic trends in the local community, making contact with local community groups and participating in programs designed to increase community awareness of banking provides mutual benefit

Knowing the credit needs of the Community

Despite a considered decision to do no or very little consumer lending, business bank can have significant fair lending issue. The decision by a Board that a bank will do no consumer lending can in of itself become a fair lending concern. Although this may be an extreme case it is possible. Consider a bank with a deposit base of 70% retail customers. the decision to make no consumer loans may make economic sense, but it may result a large portions of the Banks assessment area being excluded.

Fair lending does indeed apply to all banks and the failure to consider the implications for your bank can lead to deep trouble.