From supervisory priorities and speeches to enforcement actions, the banking regulatory agencies haven’t been shy about their emphasis on fair lending enforcement. Now they are letting us know the results of those efforts: a 175% increase in referrals to the Department of Justice for Equal Credit Opportunity Act (ECOA) violations since 2020.
In 2023, the FDIC, NCUA, Fed, OCC and CFPB made 33 DOJ referrals, up from 12 in 2020, according to Fair Lending Report of the Consumer Financial Protection Bureau published in June 2024. Overall, the agencies cited 189 institutions for violating ECOA and Regulation B (its implementing regulation).
What violations are tripping up lenders? Which agencies are referring the most cases to the DOJ? Read on to find out.
Understanding Agency Fair Lending Referrals
The agencies are required to refer matters to the Department of Justice if they believe a lender has a pattern or practice of lending discrimination that violates ECOA. They also have the latitude to refer other suspected ECOA violations.
The Department of Justice then investigates these matters, often pursuing legal action against offenders. The DOJ is particularly focused on eradicating redlining through its Combatting Redlining Initiative. Launched in October 2021, the ongoing effort has resulted in more than $122 million in redlining settlements against 12 financial institutions ranging in size from $385 million to $93 billion million in assets. It includes the largest-ever redlining settlement: $31 million.
What Types of ECOA Violations Are the Agencies Referring?
CFPB. The CFPB made 18 fair lending referrals to the DOJ related to redlining and discrimination. Areas of discrimination included race, national origin, receipt of public assistance, sex, and age. The CFPB noted discrimination in pricing exceptions and predatory targeting based on race and national origin. The CFPB also reported similar discrimination in credit cards.
FDIC. The FDIC came in second, referring seven fair lending matters. Four cases involved redlining based on race and/or national origin. One involved discrimination in commercial loan underwriting based on race, color, national origin, and religion. Gender-biased auto loan pricing was the source of another referral, while another reported auto loan pricing discrimination based on race and national origin.
NCUA. The NCUA sent six ECOA matters to the DOJ. They involved discrimination based on age or marital status.
OCC. OCC made one redlining referral to DOJ for discrimination based on race, color, or national origin in mortgage lending.
Fed. The fed referred one fair lending matter to DOJ involving discrimination based on marital status in agricultural and commercial lending.
HMDA Reporting Issues
HMDA violations are one of the most frequently identified fair lending issues, according the CFPB’s fair lending report.
Mortgage lenders are required to collect and report applicants’ demographic information. If the applicant chooses not to share the information, the loan officer is supposed to try and collect the information by visual observation or the applicants’ surname. This information is important because it allows lenders, regulators, and others to identify potential fair lending issues – but the rate of non-reporting has been on the rise since 2019, the CFPB says.
What does HMDA data reporting rates look like? According to a recent CFPB blog:
- 50% of lenders include demographic information for 94.3% applications.
- 75% of lenders include demographic information for at least 88% of applications
- The bottom 10% of lenders are 4.4 times more likely to fail to report demographic information than median lenders.
The CFPB also analyzed loan officer performance, noting that there were more than 7,000 loan officers in the U.S. who said demographic data wasn’t provided by the applicant 95% of the time – an “implausibly” high rate.
There are many reasons for high levels of nonreported demographic information, including intentional misreporting, ineffective policies and procedures, a lack of monitoring and controls, or poorly designed applications. Loan officers who consistently fail to report demographic information may be discouraging applicants from answering the questions or deliberately misreporting the information, the CFPB says.
Implications for Mortgage Lenders and Other Financial Institutions
As regulatory scrutiny of fair lending intensifies, financial institutions must proactively address fair lending risks. Consider the following steps:
- Conduct a comprehensive review of your fair lending compliance program. Not sure where to begin? Download our whitepaper: Uncovering Fair Lending Risk to Build a Stronger Fair Lending Program
- Regularly analyze lending data. Fair lending analytics help uncover potential fair lending risk – highlighting potential disparities that need attention. Lenders that regularly analyze their lending data understand where their applications are coming from, how they compare to their peers, and whether similarly situated individuals are treated similarly. Learn more in our blog post: Is Your FI Complying with Fair Lending Laws? - Leverage Analytics
- Enhance monitoring and testing of credit decisioning processes, especially those involving AI or machine learning. The best way to resolve a problem is to catch it early and correct it before it snowballs into a bigger issue. In addition to leveraging fair lending analytics, make sure your institution has an ongoing process for evaluating compliance with internal fair lending policies and whether those policies are effective. Wondering how? Our free download Compliance Review Roadmap for Financial Institutions can help.
- Strengthen policies and procedures around pricing exceptions. Pricing exceptions are a common source of fair lending violations. Limit the risk with advice from this blog post 6 Tips for Managing Exceptions & Lowering Your Fair Lending Risk.
- Invest in robust HMDA data collection and reporting systems. It’s not enough to enforce HMDA data collection policies. You also need to scrub the data to ensure its clean and ready for transmittal. We show you how here: HMDA Data Scrubbing FAQ.
- Implement rigorous fair lending training for all relevant staff. Lending discrimination is rarely intentional. It happens when people don’t understand the policies they need to follow and why. Staff that understands their role in ensuring all applicants are treated fairly is one of the best defenses against fair lending violations. Need advice on how to set up effective fair lending training. Check out this blog post: 9 Fair Lending Compliance Training Essentials.
The regulatory agencies focus on fair lending enforcement isn’t ending any time soon. Follow these six steps to help protect your institution – and your borrowers – from fair lending violations.
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