Will
Disparate Impact Ruin Banks? Not At ALL!
Last week’s Supreme Court decision in the case of Texas Department
of Housing and Community Affairs v. Inclusive Communities Project, came
as a surprise to many observers of the court.
This was a case that had the potential to severely cripple the heart of
the Fair Housing Act of 1968. At issue
in the case was the principle of disparate impact. Many predicted that this principle would be
struck down. For banks, the hope was that
with the end of disparate impact, there would be one less thing to worry about. But the truth is that there was nothing to
worry about from the start, as long as you have a sound fair lending program! The
ruling provides a good opportunity to revisit your fair lending compliance program.
Briefly the facts of the case are as follows;
“A
federal appeals court said a Dallas-based fair housing group, The Inclusive
Communities Project, Inc., could use statistics to show that the effect of
policies used by the Texas Department of Housing and Community Affairs had a
negative impact on black residents.
The
fair housing group said that even if there was no motive to discriminate, the
government’s policies still harmed black residents. The effect, the group
claimed, was perpetuating segregated neighborhoods and denying blacks a chance
to move into areas with better schools and lower crime.
Texas
officials argued that it was unfair to have to justify or change policies that
don’t facially discriminate. While disparate impact has been used routinely in
employment discrimination cases, they said such claims were not expressly
written into the housing law. They argued that allowing them would essentially
force them to make race-conscious decisions to avoid liability.” [1]
Ultimately the US
Supreme Court determined that the language in the Fair Housing Act that
prohibits housing discrimination based on race allows for disparate impact
cases.
What is
Disparate Impact?
Put in its most
rudimentary terms, disparate impact occurs when a policy or practice that is
neutral on its face, has a negative effect on protected groups of people in
disproportionate numbers. In other words
under the principle of disparate impact, even though an intention to discriminate
might not be proven if the effect of a policy is discriminatory it is
illegal.
A quick example of
this may apply to a bank. Suppose the
management of a Bank decided that for mortgage loans, the bank would no longer
consider part time income for calculating debt to income ratios. This rule would apply across the board to
men, women and people of all races, creeds and religious beliefs. For our example, there is no question that
this policy is being fairly applied to all who attempt to qualify for a
loan. Now suppose the examiners do a
review of the adverse actions of the bank and find that more than 30 % of all
declines are to women and 25 % of declines are to minorities. These numbers are in spite of the fact that
women and minorities make up no more than 8 %of applicants. The reason for the high decline rate? The population of people that tend to have
part time work is heavily represented by women and minorities. The “no part time work” rule may have been
equally applied, but it disproportionately impacted women and minorities
negatively. This could easily become a
disparate impact case.
Making chicken
salad out of ……
So what are the
implications for bankers? Does this mean
that the time has come to hide from consumer lending? Not at all!
It does mean that now is an excellent time to review your overall Fair
Lending compliance program.
Of course when we speak of this topic, we must first qualify
that there is no one Fair Lending law.
There are a series of laws that come together to create the umbrella
that we call Fair Lending. These
include:
- Reg. B
ECOA
- Reg. C
HMDCA
- Reg. Z
Truth in Lending
- Reg. BB
CRA
- Reg. Z Advertising
- UDAAP
- Reg. DD
Advertising
- State Laws
But when they are
considered for Fair Lending purposes, these laws come together like no other
set of laws. The Fair Lending review
looks at the impact of practices at a bank to determine whether a
violation has occurred as we previously discussed. Fair Lending is in fact, one of the areas of
compliance where you may have met all of the requirements of a regulation and
still have a violation. Fair Lending has always been an examination area that
is subjective. Over the past few years,
this area has become increasingly complex. The regulators have made it clear
that this will be an area of emphasis that has the potential for enforcement
action. It is therefore, critical for
banks to perform a risk assessment in this area.
Have you considered what Your Declines and Withdrawals Say about You?
Currently banks
that are HMDA reporters are required to keep information on mortgage borrowers
that withdraw their applications before the process is completed. In
addition information is required to be kept for loans that were approved and
offered to the applicant, but rejected. This information can be used for
a number of purposes. For example, a high level of withdrawals can
be an indication that the loan process is taking too long to reach a
decision. High withdrawals rates could also indicate that the pricing at
your bank is not competitive.
Granted that some of the information that is required for banks
to collect by HMDA is otherwise prohibited. For example, you cannot ask
an applicant for a small business loan his race or ethnicity. That is
unless, you are conducting a self-assessment of your overall
compliance. Regulation B allows just such an exemption. [2]
We suggest that
with a little extra analysis, this same information could tell you about the
experience of minorities and women. Are women withdrawing at a
higher rate than men? The same question could be asked about minority
applicants. You could determine if applicants from low to
moderate income tracts have the same experience as those from medium income and
high income tracts. It is important to point at that the lack
of minority or women applicants also tells a story!
Declines
Both HMDA and the
ECOA require lenders to keep information about declines. However, only
HMDA requires that information about the borrower’s race, ethnicity and gender
should be kept. This information is generally used for a few purposes
such as determining whether applications are being notified in a timely manner
as required by the regulations. In addition, the decline files are
generally used for the purpose of determining that the proper reasons for the
declination have been given to the customer.
Here again, we note
that with a minimal adjustment to the information that is collected, you
could gather data about the experiences of women and minorities as well as low
to moderate income tracts. This information would also help the bank to
determine whether certain loan parameters are disproportionately impacting a
certain segment of the community.
Using information from
declines and withdrawals, your bank can also get a much better idea of where your
customers are coming from in the assessment area. If certain areas are
being missed, the conversation about why and what can be done can
begin.
Social Media
Another area that
examiners will emphasize is the bank’s overall administration of the complaints
process. Most of our clients already
have a complaints log and a policy in place that requires staff to respond to a
complaint in a reasonable time. However,
the expectation in the near future will be for banks to compile and categorize
complaints and to report the results of this effort to the Board. Do the complaints represent a pattern? Are your customers trying to tell you
something about the level of fees being charged? Maybe there is a branch where discouragement
is happening inadvertently. The point
is the complaints received should be analyzed for patterns and concerns. In
addition, there should be evidence that the patterns noticed are being
discussed with the Board.
As many Banks use
social media these days, a whole new possible area of receiving complaints has
opened up. The expectation is that
someone at the bank will review social media for the possibility of serious
complaints that must be answered and included in the aforementioned analysis.
Disparate Impact is
not always easy to see, but these cases are here to stay. Now is an excellent time to make sure that
your bank is meeting the needs of its community.
[1] Supreme Court upholds key tool for fighting
housing bias- Sam Hananel, The Washington Post June 25, 20154
[2] 202.5
(b) (1) A creditor may inquire about the race, color, religion,
national origin, or sex of an applicant or any other person in connection with
a credit transaction for the purpose of conducting a self-test that meets the
requirements of §202.15.
