Fair Lending Laws: Preparing for Compliance and Examination
Smith, Brian W., Horn, Charles M., Journal of Commercial Lending
A bank's satisfactory compliance with fair lending laws is determined initially by the bank regulatory examination process. All federal bank regulatory agencies (Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision, and Federal Deposit Insurance Corporation) have developed and implemented specific examination criteria for determining an institution's compliance with relevant federal fair lending laws and regulations.
For each agency, the examination can take the form of a "special" compliance examination or be part of the overall examination of the institution. Banks are assigned ratings by their principal federal regulators as a result of the examination of fair lending compliance. These ratings--typically on a scale of one (best) to five (worst)--reflect the regulatory agency's assessment of two areas:
1. The level of the financial institution's compliance with laws and regulations.
2. The extent and quality of the institution's compliance systems and controls.
Unsatisfactory compliance ratings can have significant adverse consequences vis-a-vis the potential for regulatory enforcement action and agency review of otherwise unrelated corporate applications.
Unsatisfactory ratings also result in follow-up examinations and usually place the institution on a schedule of more frequent and often targeted examinations.
Heightened interest in fair lending compliance by the federal regulators will lead to more comprehensive and aggressive agency examinations and enforcement and, in cases deemed egregious, to referrals to the Department of Justice. A bank's informed and active intervention in the compliance, examination, and enforcement process can serve to ameliorate, if not prevent, the effects of an adverse examination report and the occurrence and severity of agency enforcement action.
To intervene, banks must fully appreciate the legal requirements they face, the current examination standards and objectives, and the supervisory enforcement process. Of course, each bank must also fully comprehend its own lending practices and the conclusions that can be drawn from the data that reflect these practices.
As a general matter, each of the federal banking regulators examines for and enforces compliance with two fair lending laws: the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Federal Reserve Board Regulation B; and the Fair Housing Act (FHA) and its implementing regulation.
The ECOA prohibits discrimination with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), receipt of income from public assistance programs, and the good faith exercise of rights under the Consumer Credit Protection Act.
Regulation B has been structured to cover the requirements imposed by a bank before, during, and following the application and evaluation process of granting credit.
The FHA makes it unlawful for a bank to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, or sex. Any bank making housing loans is subject to both the FHA and the ECOA.
Community Lending Laws
Closely related to the fair lending laws are those laws directed at determining if a bank is meeting the credit needs of the particular communities in which it operates. These laws--the Home Mortgage Disclosure Act (HMDA) and its implementing regulation, Federal Reserve Board Regulation C; and the Community Reinvestment Act (CRA) and its implementing regulations--are also an important part of the regulatory examination and enforcement process and are directly related to a bank's compliance with the fair lending laws indicated above.
The HMDA is a disclosure law that neither prohibits any specific activity of lenders nor mandates a quota system for mortgages to any group or geographic area. …