General Industry Letters
Mortgage Banking Letters
Fair Lending Policies and Procedures
August 26, 1998
To: The Institution Addressed
Re: Fair Lending Policies and Procedures
Section 296-a of New York States Executive Law prohibits discrimination in consumer credit transactions. Accordingly, the activities of mortgage bankers operating in New York fall within the purview of Section 296-a. The Banking Departments examinations of mortgage bankers now include enhanced procedures designed to test for compliance with the fair lending statute. A finding of noncompliance can result in a fine, return of fees and interest paid by affected consumers, suspension of operations, or revocation of the mortgage banker license.
Discriminatory treatment can take many forms. The refusal to make credit available to protected classes of consumers (i.e. minorities, women, the disabled, etc.) has not generally been characteristic of the activities of mortgage bankers. For mortgage bankers, a more likely source of fair lending violations, and one that will receive due attention during the examination, arises out of the practice of taking overages.
An overage occurs when a lender encourages or permits a loan officer to impose a higher number of points or a higher interest rate on a loan to certain borrowers than is imposed for the same product offered to other borrowers. Overages are typically shared by the lender and the loan officer as a means of increasing compensation. Lenders have indicated that the ability to charge overages affords them the opportunity to provide an incentive to its loan officers.
Be advised that the Banking Department will review lender policies during examinations, to determine whether overages are taken and, more importantly, to assess whether such practices have resulted in lending discrimination.
The practice of imposing overages is not illegal under Section 296-a of the New York State Executive Law, the Equal Credit Opportunity Act ("ECOA") or the Fair Housing Act ("FHA"). However, as the following examples demonstrate, the practice may, in certain circumstances, result in illegal discrimination.
- Whenever a loan officer is given discretion in setting the price of a loan, as well as when to impose an overage, there is a chance that disparate treatment on a prohibited basis might occur. Therefore, a lender that permits overages in its mortgage loans should review its lending performance to ensure that the overage policy is applied fairly and without regard to race, gender, or any other prohibited factor under Section 296-a, ECOA and the FHA.
- A lender whose policy permits overages in mortgage loans of a certain amount, for example, should evaluate whether the policy has a disparate impact on applicants on a prohibited basis. For example, a lender who permits overages only in loans of under $100,000 may review its lending performance and find that, despite treating all applicants for such loans evenhandedly, a disproportionate number of borrowers who receive loans under the threshold and who pay overages are minorities. This lender will have to provide a defense, based on business necessity, against the claim that the neutral application of its policy has adversely affected a group on the prohibited basis of race in violation of Section 296-a, ECOA or FHA. Also, even if the lender offers a valid business necessity defense, its practice still would be impermissible if the business objective could be achieved by other means with a less discriminatory impact.
- A lender whose policy permits overages in mortgage loans originated in certain geographies must be able to demonstrate whether legitimate market conditions differ among the relevant geographies. For example, a lender who imposes overages in urban counties but does not do so in contiguous suburban counties will need to demonstrate that legitimate market factors exist that support the policy of treating the geographies differently.
To the extent that you permit originators and brokers to impose overages, the Banking Department will also review your ability to effectively monitor your program as well as your ability to effectively train your staff.
In designing and implementing policies and procedures to ensure compliance with the fair lending statute, it may be appropriate to assess whether employees with a financial stake in overages are constrained by effective disincentives from engaging in discriminatory pricing or practices. Below is a list of suggested elements you may want to include in your fair lending program:
- Customer Contact. Are adequate policies, procedures, employee training and management oversight in place to ensure applicants will receive consistent treatment in conformance with fair lending principles? For example, have you considered conducting customer satisfaction surveys to monitor performance of your employees who have had contact with the applicant?
- Pricing. Do your policies, procedures, employee training and management oversight ensure equitable treatment of all applicants in negotiating the interest rate and any points? For example, do you use standard pricing sheets throughout your organization? Are they sufficiently comprehensive to provide pricing guidance in nearly all situations, and are copies routinely retained for future reference? Do you monitor compliance with these instructions? Are pricing exceptions, and the reasons therefor, adequately documented and approved at appropriate levels?
- Underwriting. Do your policies, procedures, employee training and management oversight ensure that your credit officers do not discriminate against protected classes in underwriting decisions. For example, do your underwriting policies consider applicants with non-traditional credit histories? Do you offer any help to applicants who do not meet your minimum underwriting guidelines?
- Second Review. Are all denied applications routinely reviewed by a senior lending officer to determine if underwriting guidelines were followed? Is an attempt made to explore alternatives, such as other forms of credit, other acceptable means of documenting employment history or income sources, or other lending programs for which the applicant may qualify.
- Collection and Foreclosure. Are your collection and foreclosure policies and procedures, employee training and management oversight sufficient to ensure equitable treatment of all debtors?
- Third Party Originations. If you are using brokers to originate applications, do you require that they demonstrate knowledge of and compliance with fair lending principles and commit in writing to observe these practices? Are copies of relevant fair lending policies and procedures given to the brokers?
- Complaint Resolution. Do you have policies, procedures, employee training and management oversight to ensure that fair lending complaints are identified and forwarded to a designated individual for appropriate attention?
- Training. Do you periodically review your organizations employee training needs to ensure initial and follow up training is given on a timely basis. Are course outlines kept up to date with changes in the law, regulation and judicial interpretations?
- Marketing. Have you reviewed your marketing strategy to determine whether it targets protected classes in ways inconsistent with fair lending principles? For example, are more expensive credit products promoted to certain groups and not others?
- Compliance Monitoring. Is your organization devoting sufficient management resources to ensuring compliance with your fair lending policy? Does the individual assigned to monitor compliance have sufficient experience, training, authority, independence and staff to carry out his or her assignment? Does your monitoring program review lending by loan officer and branch office as well as on company-wide and state-wide bases?
The content and enforcement of fair lending statutes and regulation continue to evolve as a result of judicial precedents, new legislation and regulation and actions by various regulatory bodies. If you should have questions about fair lending issues not encompassed by the above, we would welcome the opportunity to meet with you to discuss your concerns.
Very truly yours,
Richard L Ehli
Deputy Superintendent of Banks
Mortgage Banking Division