Industry Letters

Fair Lending Plan Requirements

July 19, 1999

To the Institution Addressed:

Re: Fair Lending Plan Requirement

The New York State Banking Department ("NYSBD") must ensure that the application and underwriting processes for loans in New York State made pursuant to the provisions of Article IX of the Banking Law by Licensed Lenders and retail installment contracts and retail installment obligations acquired by Sales Finance Companies pursuant to Article XI-B of the Banking Law do not violate Section 296-a of the Executive Law, which is New York's fair lending statute. As part of our effort to eliminate prohibited practices, the NYSBD requires applicants seeking a license to become a licensed lender or sales finance company ("Lender"), applicants seeking approval for a change of control of a Lender or applicants seeking permission to open an additional branch to submit a satisfactory Fair Lending Plan ("Plan") as part of their application. Please be advised that implementation of this requirement is not an attempt by the NYSBD to compel Lenders to abandon the use of objective factors in evaluating the creditworthiness of a borrower when determining whether to underwrite a loan. Risk based pricing is and continues to be valid in New York, provided that it is not impermissibly tied to a protected class. This requirement to submit a Plan shall not apply to any sales finance company that can demonstrate to the NYSBD that its activity shall be limited to the purchase of retail installment contracts and/or obligations under circumstances where it is not involved in the application and/or underwriting processes of retail installment contracts or retail installment obligations.

The NYSBD requires that the Plan address the manner in which an institution ensures that loans are made in conformance with fair lending laws. Although there is no standard formula that the Plan must follow, the NYSBD is providing the following list, which is not inclusive, to aid in the development of a Plan:

  1. It is the responsibility of the Board of Directors and senior management to formulate the Plan and ensure that the lending practices of the Lender comply with its provisions. If the Board of Directors does not have a Fair Lending Committee, then the Plan should designate which Committee of the Board is responsible for the institution's compliance with Executive Law §296-a;
  2. The fair lending compliance program should monitor the implementation of and adherence to the Plan's policies and procedures. Monitoring should be conducted for the Lender as a whole, as well as sub-parts of the Lender. Further, the Plan should provide for monitoring, on an ongoing basis, the Lender's application and underwriting processes as well as the Lender's pricing policies. In particular, the compliance program should ensure that the business personnel understand their duties and responsibilities under the Plan and that such duties are being carried out;
  3. The Plan should implement a training program that provides adequate training to new hires and current employees, including management and other key personnel, and provides lending personnel with at least semiannual updates on fair lending issues. Compliance personnel should administer and conduct the training program and participants should certify that they understand and commit to upholding the principles of Executive Law §296-a and the policies and procedures contained in the Plan;
  4. The Plan should provide for an automatic and timely review by a higher level supervisor of all applications that are rejected or withdrawn;
  5. The principles of the Plan should extend to the Lender's refinancing and collection practices;
  6. The Plan should address how the Lender will disclose and document to an applicant that he meets underwriting standards that typically would qualify him for an alternate loan product and whether that applicant will be referred to an affiliated lender;
  7. The Plan should identify actions taken to demonstrate that the Lender has taken the appropriate measures to extend the policies and procedures of the Plan to the solicitation, establishment and maintenance of the institution's relationships with other lenders. The Lender should obtain written agreements from the other lenders with which it has relationships certifying that they acknowledge their responsibility to comply with Executive Law §296-a and the policies and procedures contained in the Plan to the extent such policies and procedures are applicable to them. Such agreements should be updated regularly;
  8. The Plan should contain a process by which complaints from applicants relating to alleged violations of Executive Law §296-a by a Lender are resolved efficiently without being unduly burdensome to the applicant:
  9. The Plan should contain a process by which a Lender's marketing strategies directed to protected class applicants or minority communities are reviewed and approved and periodically evaluated by the designated Compliance Officer prior to distribution to ensure that those strategies comply with the provisions of Executive Law §296-a; and
  10. The Plan should be periodically reviewed by the Compliance Officer and senior management to ensure that it remains current.

This letter and the above list should serve only as a general guideline for developing the Lender's Plan. Further, even though the Lender's Plan may address all of the areas outlined above, that is no guarantee that the lending activities being conducted by the Lender comply with the provisions of Executive Law §296-a. Lenders, or their legal counsel, should direct any questions or comments to Alvin A. Narin, Assistant Counsel, at (212) 618-6680.

Very truly yours,

Peter M. Philbin,
Deputy Superintendent of Banks