Academic journal article ABA Banking Journal

How One Bank Lends Fairly - and Affordably

Academic journal article ABA Banking Journal

How One Bank Lends Fairly - and Affordably

Article excerpt

When First Farmers and Merchants National Bank learned that fair lending would be a part of its June compliance exam, the bank's officers didn't bat an eyelash.

True, the $456 million-assets bank, with limited resources and no prior experience in fair-lending examinations, didn't know exactly what to expect. But in the past year the Columbia, Tenn., bank has concentrated on developing an internal fair-lending committee and related programs that it felt would meet federal requirements.

The fair-lending portion of the visit by national bank examiners lasted about two and a half weeks. It was part of an overall six-week exam that also looked at other aspects of compliance, as well as safety and soundness and trust.

During those two-and-a-half weeks, the examiners spent a great deal of time checking loan files, Waymon Hickman, president and CEO, explains. They looked at loan applications that had been denied, comparing minorities and non-minorities; approved loan applications, again comparing minorities and non-minorities; and loans made to single males compared with loans made to single females. [For a more extensive discussion of regulatory sampling methods, see this month's Compliance Clinic.]

Before the exam, "we weren't quite sure what they would be looking for in the fair-lending area," Hickman comments. "But the examiners were very complimentary of our program after looking at it."

Affordable housing helps

Those compliments were due less to the extensive documentation examiners usually seem concerned with, and more to the bank's results-oriented fair-lending committee and programs, according to senior vice-president John P. Tomlinson.

"We were encouraged to move forward with our program because the regulators seem to have more tolerance with higher loan-to-value ratios these days," Tomlinson says.

The bank's response to these changing attitudes is its Affordable Housing program, which spans all four counties in which the bank operates. The program was launched this past spring.

The Affordable Housing Program was designed to help low-to-moderate income borrowers in First Farmers' four-county market achieve home ownership. The bank designated $3 million for loans under the program.

First Farmers finances up to 95% of the purchase price for a maximum term of 25 years. The interest rate for the first five years is set at 7.20% with annual adjustments thereafter pegged to Treasury bill rates. Caps are one percent a year and four percent over the life of the loan.

The bank holds the loans in portfolio, since "it would be more difficult to document a case for loans being sold into the secondary market," explains Tomlinson, adding, "it's cheaper to the consumer as well" to portfolio the loans.

And though "affordable housing doesn't really cross over into fair lending per se, since it's more of a Community Reinvestment Act requirement," Tomlinson notes, the program's concept developed from concerns raised by the bank's fair-lending committee.

In order to analyze its fair-lending policies, First Farmers established an internal committee that meets regularly as well as goes out to meet with groups that represent underserved members of the community. Of the approximate 140,000 residents in First Farmer's four-county market, 10% are minorities, according to recent census tract data. Within that four-county area First Farmers identified four low-income areas as well.

Through several focus groups the committee found a need for more affordable first mortgages in the community, Tomlinson explains. …

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