$30,000 Fair Lending Settlement Highlights Power of Community Groups

Earlier this month, news hit of a Fair Lending settlement with a financial institution in New York. This one is interesting for a few reasons. In this post, you'll learn all about the settlement, and what it might mean for you.

This year, news of regulatory updates and leadership changes at the regulatory agencies has dominated the headlines. We've heard of increased focus on Redlining, which we will be talking about more in the coming weeks, and of CRA modernization, but of Fair Lending enforcement actions we've heard little. This Fair Lending settlement marks a shift.

That's not to say the regulators have been inactive - not at all - just that their approach to identifying and penalizing potential evidence of discrimination appears to be changing. 

A recent Fair Lending settlement with a $1B New York-based credit union highlights the power of housing and community groups as watchdogs in your market area.

This settlement is a prominent example of how communities are still focused on Fair Lending. It involves mystery shoppers, allegations of discrimination, and even a hint of Redlining. Here's everything you need to know:

What is the Complaint?

In 2016, Long Island Housing Services, a Fair Housing advocacy and enforcement group, filed a complaint with the U.S. Department of Housing and Urban Development (HUD) against Suffolk Federal Credit Union that alleged discrimination on the basis of race and ethnicity.

According to Long Island Housing Services' Executive Director Ian Wilder, they found potential "bias against people who were trying to get mortgages based on race or ethnic background." This alleged discrimination violates state regulations and the Fair Housing Act. 

How Did the Community Group Identify the Potential Discrimination?

Long Island Housing Services conducted field tests, wherein individuals of different races and ethnicities asked about refinancing a loan or buying a home. In total, they conducted five in-person tests and four phone tests.

Their tests used a combination of white, African-American, and Hispanic individuals. In their tests, the white potential borrowers were less qualified than African-American and Hispanic potential borrowers. 

Long Island Housing Services claimed that the white potential borrowers received better, faster service, according to the complaint. Here's how, according to the complaint:

• One African-American applicant allegedly was offered a higher interest rate loan than a less qualified white applicant.
• In another alleged instance, an African-American tester was told to apply for pre-approval before speaking with a loan officer. In contrast, a white tester was contacted by a loan officer who gave specific information and offered to help with the application process.

Long Island Housing Services appears to have also analyzed 2011-2014 HMDA data to determine that the 55,000-member credit union allegedly denied African-Americans loans at a higher rate than white applicants.

How Did the Credit Union Respond?

The Suffolk FCU appears to have taken the allegations seriously, even though HUD is not involved at this point. They deny the allegations of discrimination, but are still committed to ensuring there are enough controls in place to prevent it.

Among other things, the credit union will increase staff training, and has agreed to hire a third party to test for evidence of bias or discrimination in employees - we'll get into these more later.

“Suffolk Federal Credit Union has a long history of serving the people of Suffolk County, and will continue to work to ensure equal access to mortgages and other financial opportunities for all members of our community. As a member-owned cooperative, we determined that it was in the best interest of our members to resolve this matter with LIHS quickly rather than endure a lengthy and costly litigation process.”

- Ralph D. Spencer, President of Suffolk Federal Credit Union, in a statement

What is the Settlement?

The settlement is broad, covering everything from marketing to training. Here are some of the key elements, but we'll go into much more detail below:

• Subsidies totaling $30,000.
• Additional marketing in under-served areas.
• Multi-lingual marketing and a Language Access Line for individuals whose primary language is not English.
• Financial education programs.
• Additional Fair Lending training.
• Fair Lending self-testing.

The credit union settled directly with the community group, agreeing to provide $1,250 in down payment and closing cost subsidies to eight different applicants per year, for a total of $10,000 per year, for three years in certain Suffolk County ZIP codes. 

The subsidies, which can be used for the purchase of a primary residences, are eligible to borrowers in the following ZIP codes: 11701, 11706, 11713, 11717, 11722, 11726, 11749 and 11798. These areas are considered "under-served," and the focus on ZIP codes seems to hint at a potential Redlining issue.

In addition to the subsidies, Suffolk FCU will conduct a targeted marketing and financial education programs in those same ZIP codes. The credit union will also continue to offer marketing materials in both English and Spanish, and will open up a Language Access Line for borrowers who don't or can't speak English.

The credit union will also offer additional Fair Lending training to all employees who engage with customers regarding residential lending, and will continue to provide Fair Lending training to all customer-facing employees.

They will also use an independent third-party to conduct enhanced Fair Lending testing in an effort to identify potential customer service or discrimination issues.

What Does This Mean For You?

Community advocacy and Fair Housing groups are more sophisticated now, using data analysis and mystery shoppers to identify potential discrimination. Once again, this highlights the need for strong Fair Lending analysis.

In addition, community groups can be powerful allies or enemies - it's your choice how to approach them. Community groups can and will use mystery shoppers to identify discrimination. The loan officer who allegedly offered to help an applicant probably wasn't trying to make a racial statement; this is an example of where a action taken inconsistently can result in the appearance of discrimination. Make sure that your employees are treating all similarly situated individuals similarly, regardless of prohibited basis characteristic. This may require additional Fair Lending training and self-testing. 

As the public and regulatory attention remains on Fair Lending, Redlining, and CRA, make sure that your lending compliance program is adequately controlling risks. Fair Lending risk assessments should be conducted annually; if you haven't scheduled yours yet, now is as good a time as any.

Ncontracts Viewpoint: Fair Lending remains one of the most important, costly, and public areas of compliance today. Even as the federal regulators appear to be backing off of enforcement, state regulators and community groups are picking up the mantle. 

Cultivating a commitment to fairness, equity, and inclusion at your financial institution will serve you well, not only as a hedge against any enforcement- or settlement-related risks, but also in your good service to your community. As we've said many times, good compliance is good business.

Whether you're looking for Fair Lending analysis, training, or risk testing, know that we're here to help. We offer all of those solutions - and much more. We would love to help your institution comply and grow.

Our most popular Fair Lending solution is our Fair Lending analysis software, which will analyze your financial institution's data to determine if you have risk of discrimination. Plus, you'll get a guided walk-through of your data with an expert analyst, so you know exactly the story your data tells. Get a demo here.

In the meantime, check out our article on building your own lending compliance management system or download our free Fair Lending 101 Info Kit: