The regulators continue to focus on Fair Lending as evidenced by 3 unique year-end settlements (all three taking place in the second half of December). Below are highlights from these settlements along with the 5 key industry messages that the regulators are telegraphing to lenders. Is your financial institution's compliance program prepared comply with the telegraphed guidance?
Three unique settlements in December underscore the fact that the regulators are still focusing on Fair Lending. These settlements provide five key compliance reminders. Before we outline the five key industry messages, lets take a quick look at the three recent settlements:
1. PNC Financial (National City Bank)
Allegation: The allegation claimed that National City Bank engaged in a pattern or practice of discrimination that increased loan prices for 75,000 African-American and Hispanic borrowers who obtained residential mortgages between 2002 and 2008 from National City Bank’s retail offices and nationwide network of mortgage brokers. National City Bank’s business practices allowed its loan officers and mortgage brokers discretion to vary a loan’s interest rate and fees (“subjective and unguided pricing discretion”).
Additional Insight from Claim: The allegation claimed that National City did not have objective criteria, or provide guidelines, instructions or procedures to be followed when setting price above or below “par” interest rates. In addition, National City did not require its loan officers to document the reasons for the overage/underage charge. Finally, the bank did not have a meaningful monitoring on race or national origin.
Consent Order (filed 12/23/13):
- $35 million compensation to borrowers.
- Note: National City was one of the 10 largest US banks and mortgage lenders prior to selling itself to PNC in 2009.
Claim: Claim brought forward by the US Department of Justice (DOJ) and the Consumer Financial Protection Bureau (CFPB).
Read More: Complaint, Consent Order, Press Release
2. Ally Financial
Allegation: The allegation claimed that Detroit-based Ally Financial Inc. and Ally Bank engaged in discrimination against 235,000 African-American, Hispanic and Asian/Pacific Islander borrowers in their auto lending since April 1, 2011.
Background: Ally makes most of its loans through 12,000+ car dealers nationwide who help their customers pay for a new or used car by submitting the customer application to Ally (indirect auto lending). Ally’s business practice, like most other major auto lenders, allows car dealers discretion to vary a loan’s interest rate from the price Ally initially sets based on the borrower’s objective credit-related factors. Dealers receive greater payments from Ally on loans that include a higher interest rate markup. The coordinated investigations by the DOJ and the CFPB determined this system of subjective and unguided pricing discretion directly results in Ally’s qualified African-American, Hispanic and Asian/Pacific Islander borrowers paying more than qualified non-Hispanic white borrowers.
Additional Insight from Claim: The allegation claimed that Ally was giving dealers discretion to vary a loan’s interest rate, gave greater payments on loans with higher interest rates, did not sufficiently monitor its interest rate markups for discrimination, and the dealers were not required to document their markup decisions.
Consent Order Filed 12/23/13:
- Ally agreed to pay $80 million in alleged victims and $18 million to the CFPB’s Civil Penalty Fund to settle claims that it engaged in a pattern or practice of discrimination. In addition, Ally must refund discriminatory overages to borrowers for the next three years unless it significantly reduces disparities in unjustified interest rate markups.
- Other requirements: Establish a compliance committee; develop a compliance plan for review to the CFPB and DOJ; develop a compensation plan that limits maximum rate spread between buy rate and contract rate; provide regular notices to all dealers regarding the ECOA and discretion; conduct quarterly analysis of dealer specific contract pricing; conduct quarterly review of disparities on a prohibited basis; appropriate corrective action to dealers; must submit any future material changes to the compliance plan after implementation to the CFPB and DOJ for review.
Claim: Claim brought Forward by DOJ and CFPB.
Read More: Complaint, Consent Order, Press Release
3. Fort Davis State Bank
Allegation: It was alleged that Fort Davis State Bank charged Hispanics higher interest rates on unsecured consumer loans compared to rates charged to similarly situated non-Hispanic white borrowers.
Additional Insight from Claim: The allegation claimed that the Bank did not have written defined pricing guidelines or specific policies related to loan pricing of unsecured consumer loans. It also stated that the Bank did not use a uniform pricing system such as a rate sheet, and that loan officers had broad subjective discretion to set interest rates on unsecured loans.
Consent Order Filed 12/19/13:
- The Bank agreed to pay $159,000 to resolve allegations that the Bank charged higher prices for unsecured consumer loans to Hispanic borrowers than to similarly qualified non-Hispanic borrowers.
- Other requirements: Develop uniform pricing policies and procedures; monitor interest rates and require a quarterly review by senior managers; implement an ECOA Training Program; implement a Complaint Resolution Program; and evaluate and monitor ongoing compliance.
Claim: Claim brought Forward by DOJ.
Read More: Complaint, Consent Order, Press Release
The 5 Industry Messages Telegraphed by the Regulators with these Settlements
- BEWARE OF DISCRETION: Discretion in the underwriting or pricing process may bring your organization unwanted regulatory attention. When discretion and disparities both exist, you need to be prepared with crisp explanations regarding your practices.
- FAIR LENDING COMPLIANCE EXTENDS BEYOND LARGE INSTITUTIONS: The regulator focus extends well beyond the large banks. Smaller financial institutions' lending practices and compliance management systems are facing increased scrutiny.
- NEED FOR REGULAR RISK ASSESSMENTS (WITH DATA ANALYSIS): Regular fair lending risk assessments (that include data analysis) are needed to help you identify the areas of concern and allow for correction.
- NEED FOR ONGOING COMPLIANCE MANAGEMENT PROGRAM: A strong fair lending compliance management program should provide your financial institution clear guidelines (policies and procedures), training, and monitoring to manage ongoing fair lending risk.
- FAIR LENDING EXTENDS BEYOND MORTGAGE LENDING: The regulators’ focus on fair lending extends beyond mortgage lending. Lenders should take note of the recent indirect auto lending and unsecured consumer lending settlements.
TRUPOINT Viewpoint: Fair Lending compliance is a team sport! As you look to champion your firm's success in 2014, your entire management team should be aware of these end of year messages the regulators have telegraphed.
TRUPOINT Partners wishes you a successful and compliant 2014.
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