Now is the time for financial institutions to review their fair lending procedures | Bilzin Sumberg

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Early in his term, President Biden said his administration would make it a policy to eliminate “racial prejudice and other forms of discrimination in all states of home buying and renting.” Recently, this policy statement has manifested itself in regulatory proposals and enforcement action against a national banking association in what is the largest fair loan enforcement action in recent years.

At the end of August, the Office of the Comptroller (“OCC”) entered into a consent order [1] with a national banking association, Cadence Bank, on what it alleged to be violations of the Fair Housing Act during the period 2014-2016. The OCC alleged the bank failed to provide equal access to residents looking for first mortgage loans in majority minority (mostly black) census tracts and Hispanic neighborhoods in the Houston area. Without admitting or denying responsibility, the bank agreed to pay $ 3 million in civil penalties.

Notably, in making these allegations, the OCC analyzed mortgage lending activity in the Houston area and made statistical comparisons with the lending activity of other banking associations. It looked at the number of bank branches in this region and the number of Mortgage Loan Officers (MLOs) working at branches in the region compared to the number of MLOs in other regions outside of Houston.

Cadence Bank has reached a separate settlement with the Justice Department to resolve the redlining allegations.[2] Although these were separate institutions, the actions of the agencies were part of a coordinated effort. The DOJ regulations require the bank to invest more than $ 5.5 million to increase lending opportunities for residents of affected areas.

Last month, the OCC also proposed to rescind some updated fair loan rules as the agency begins work on drafting new rules.[3] Under the proposal, the OCC would revert to the previous 1995 regulation for the Community Reinvestment Act (“CRA”), a fair loan law enacted in 1977. The stated objective of an updated CRA would be to ensure that banks are doing as much as they can to support low income communities.

The CRA demands that the Federal Reserve, FDIC, and OCC encourage financial institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. It also requires these regulators to maintain a CRA site that provides information on the financial institutions they oversee as well as their CRA ratings and performance reviews.

Also last month, the Consumer Financial Protection Bureau (CFBP) announced a new rule proposed in Section 1071 of the Dodd-Frank Act to require financial institutions to collect and report credit application information to the CFBP. for small businesses, including businesses owned by women and minorities.[4] Specifically, it would require lenders to report information on the amount and category of small business credit applications, demographic information such as the race, gender, and ethnicity of the primary owners of those businesses, and the process. used to assess and approve each request. This rule would apply to a number of credit products, including term loans, lines of credit, credit cards and merchant cash advances. The proposed rule is at the comments stage.

Given this administration’s emphasis on tackling inequalities in consumer credit, financial institutions should immediately take action, if they have not already done so, to assess their lending policies. Inevitably, these proposals, in particular the amendment to Section 1071 of the Dodd-Frank Act requiring financial institutions to collect and retain demographic information, will facilitate more enforcement actions against institutions suspected of. employ discriminatory lending decisions. Therefore, now is the time for financial institutions to ensure that their credit products and lending processes do not result in unfair or disparate treatment of protected categories of borrowers and customers.

[1] Order on consent: https://www.occ.gov/static/enforcement-actions/ea2021-030.pdf .
[2] Minister of Justice regulation announcement: https://www.justice.gov/opa/pr/justice-department-and-office-comptroller-currency-announce-actions-resolve-lending.
[3] https://www.reuters.com/business/finance/us-banking-regulator-proposes-removal-updated-fair-lending-regulations-2021-09-08/
[4] Proposed rule: https://files.consumerfinance.gov/f/documents/cfpb_section-1071_nprm_2021-09.pdf.


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