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No good deed goes unpunished

A little story about bank that sincerely got into fair-lending trouble

No good deed goes unpunished

What's the big deal about fair lending issues and why should we worry about it? 

After all, there is not a bank in the country that is affirmatively and overtly discriminating against any minority or protected class.

Yet, we are all in a dither about fair lending, as we should be.

A fresh look at fair lending

Why does it matter whether we adequately comply with the Equal Credit Opportunity Act, Fair Lending Act, and implementing regulations? 

First, it matters because it is the right thing to do.

Second, it matters to our community banks because if we do not and we get into a fair lending issue with our federal regulators, then our bank will be in the penalty box for a prolonged period of time during which we will not be able to get a regulatory application approved, or achieve any cooperation from the regulators on any strategic initiatives.

Well, if no community bank is overtly discriminating against a protected class (a protected class, by the way, includes race or color, religion, national origin, sex, age or familial status, and handicap), then what are we worried about? 

Revisiting "disparate impact"—close to home

As a practical matter, we are worried about "disparate impact" of our policies and procedures on a protected class.

For example, I had a client who had been involved in a fair lending matter which eventually was satisfactorily resolved. His comment was, "This is a perfect example of ‘no good deed goes unpunished'." 

Multiple years ago, this bank engaged in long-term planning and determined that it would target a portion of its market that was not being served. This portion of the market involved a protected class. The bank took affirmative initiatives to provide lending for housing for this protected class.

The bank had two ways to make mortgage loans when a customer came into the bank. The customer could, after being given full information, request that his or her mortgage loan be sold in the secondary market, because it may save the customer a little bit of money. Or the customer could request that his or her loan be retained by the bank through the bank's in-house mortgage channel.

It turned out, most of the white, Anglo-Saxon, Protestant borrowers chose the secondary market, and most of the protected class borrowers chose the slightly higher-cost in-house channel. This did not result from any discrimination, fraud, or anything bad on the part of the bank.

It simply resulted from a cultural difference with this protected class where if an individual in that class had a difficulty with its mortgage lender, they wanted to be able to come in and talk to them.

Wow, sounds like a horrible case of discrimination and disparate impact of a policy that was neutral on its face to offer mortgage credit to all borrowers that came in on the same basis. At least that is what the friendly federal regulators said.

Disparate impact, as noted, is simply where a policy neutral on its face has a disparate impact on a protected class of borrowers.

A recent fair lending matter involved Luther Burbank Savings in California. The bank was hung out to dry because it had a policy that it would not make a home mortgage loan for less than $400,000. Most of the protected borrowers in that case, Hispanic, were not purchasing homes for $400,000 or more, so the policy had a disparate impact on them. The cost to the bank:  $2 million.

How do you protect the bank?

So what do we do? 

We make sure our Compliance Officer is on his or her "A" game.

We use external advisors to review and test for fair-lending compliance.

We make sure that the culture of our community bank is one that embraces fair lending. As noted, not a bank in the country is overtly discriminating, so this is one we really have to look at with an eye toward recognizing, "Is there some inadvertent adverse impact, disparate treatment, that is resulting from neutral policies on their face." 

If we can answer that one "no," we are in good shape.

If not, we need to amend those policies and make sure that we document how we are treating everybody who comes in on a lending transaction fairly.

Your Compliance Officer needs to be on his or her "A" game and that is the bottom line.

Jeff Gerrish

Jeff Gerrish is chairman of the board of Gerrish McCreary Smith Consultants, LLC, and a member of the Memphis-based law firm of Gerrish McCreary Smith, PC, Attorneys. He frequently contributes to Banking Exchange and frequently speaks at industry events.
Gerrish formerly served as regional counsel for the FDIC’s Memphis regional office and with the FDIC in Washington, D.C., where he had nationwide responsibility for litigation against directors of failed banks. Since the firm’s formation in 1988, Gerrish McCreary Smith has assisted over 1,500 community banks in all 50 states across the nation with matters such as strategic planning, mergers and acquisitions, common stock private placements, holding company formation and reorganization, and a wide variety of regulatory matters. Jeff Gerrish can be contacted at jgerrish@gerrish.com.

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