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More Than a Warning Shot

On April 18, Ms. Patrice Ficklin, the Assistant Director for the Office of Fair Lending and Equal Opportunity of the Consumer Financial Protection Bureau, posted a blog on the CFPB website entitled “Fair Notice on Fair Lending”. This blog is more than just a warning shot over the bow of the lending industry. The trigger has been pulled, and the missile is on the way. Fire, ready, aim.

The sections of the Dodd Frank law establishing the Consumer Financial Protection Bureau and the other consumer regulations give equal weight to two primary purposes. One is to prevent lenders from taking unfair advantage of mortgage loan borrowers, and the other is fair lending. Ms. Ficklin was not chosen to head the Office of Fair Lending and Equal Opportunity because she would be fair and impartial. She is a Harvard educated attorney who most recently was with a civil rights law firm. Prior to that, she worked for Fannie Mae where she was involved with fair lending, fair housing, and other consumer law advice as well as employment issues. Based on her background, it is a pretty safe presumption that she has a predetermined bias against lenders.

Ms. Ficklin begins her blog by stating that access to credit is necessary for many people to achieve the American dream. She then says “All too often, credit discrimination stands in the way of that access.” (Emphasis mine.) First, I hope that what she really means is illegal credit discrimination. If she does, I disagree with her strongly. That is not to say that there are not very isolated instances of illegal discrimination. As large as the lending industry is, as many loans as are made, and as many people as are involved in it, I would be surprised if there was not the occasional instance of improper discrimination. But to say that it happens all too often, implying that it occurs frequently, is a gross exaggeration. On the other hand, if she really means “credit discrimination”, then, it does not happen often enough. The heart of our economic problems today is that too many people were granted credit that did not deserve it. The mortgage lending industry in particular was not discriminating enough, mostly because of the lax underwriting standards of Fannie Mae and Freddie Mac which Ms. Ficklin was involved with and well aware.

But, we all know what Ms. Ficklin means. She says that the Consumer Financial Protection Bureau will use every tool at its disposal — and they have all of the tools and resources in the world — to protect American consumers. She particularly zeros in on illegal discrimination based on disparate impact. That occurs when a lender has a lending standard that on its face is discriminatorily neutral, but when put in practice, has a discriminatory effect on an illegal basis. Any lending practice that has a greater adverse effect on low- and moderate-income persons than on persons not in those income categories is deemed to be illegal because there is a greater proportion of protected class persons in low- and moderate-income classifications.

In the article that I wrote last week, I suggested, because of the increase in communications that lenders will have to have with their borrowers under the regulations that are coming, that institutions consider giving borrowers a financial incentive to accept required communications electronically under the E-Sign Act, much in the same way that many lenders today give a financial incentive to borrowers that authorize their loan payments to be deducted from their deposit accounts. The more I think about it, I am afraid that some examiner somewhere would say that practice was illegal discrimination because persons in low- and moderate-income categories are less able to afford a computer and internet access and therefore less able to take advantage of the incentive. Unfortunately, that is the way these people think. I recommend to every institution that it review all of its lending policies and practices with a view that they do have an improper disparate impact and then prove to yourself that you don’t.

Also, Ms. Ficklin says that there will not be a lesser emphasis on mortgage lending, but that there will be a greater emphasis on non-mortgage lending such as student loans, automobile loans, and credit cards. Every bank should review its non-mortgage consumer loan portfolios for any pricing disparity between loans to males and loans to females and any other potential of improper lending issues.

Ms. Ficklin ends her blog by saying “Today we are giving fair warning.” When you hear the tornado sirens go off, that means you should take shelter. The shelter for an institution is a program that is so clean it cannot be questioned.

The above article was provided to Andrews Hooper Pavlik PLC (AHP) courtesy of TriComply, the compliance arm of TriNovus. AHP does not guarantee accuracy of the information provided in the article and it should not be construed as professional advice. If you have any questions regarding this article, please contact Randy Morse, CPA, Partner and leader of AHP’s Financial Institution practice. AHP provides a broad range of accounting, auditing, tax, and consulting services to financial institutions throughout the state of Michigan and beyond.

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