In April of this year, the Consumer Financial Protection Bureau released its fourth Fair Lending Report to Congress. It contains a list of the top fair lending violations for 2015, as cited by the regulatory agencies that make up the Federal Financial Institutions Examination Council (FFIEC). The report covers quite a bit of ground, but one key area of emphasis was on Reg. B violations. As we consider what generated those millions in fines and restitution, several top Equal Credit Opportunity Act (ECOA) violations become clear.
Let’s take a closer look at four of the most frequent Regulation B violations cited by the FFIEC agencies last year.
Discrimination Based on Non-Finance-Related Characteristics
The first violation cited was discrimination against applicants or potential applicants on a prohibited basis regarding any aspect of a credit transaction. This rule states that “a creditor shall not make any oral or written statement, in advertising or otherwise, to applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”
In other words, there should be no discrimination in a bank/CU employee’s actions, speech, or writing, and advertisements should not exclude consumers in one specific religion, race, income bracket, etc.
As a reminder, prohibited bases include characteristics such as:
- national origin
- marital status
- source of income
Incorrectly Requesting Information that Appears on the List of Prohibited Bases
A second common fair lending violation came from financial institution employees improperly requesting information regarding any characteristic found on the prohibited bases list. A creditor requesting such information must disclose, for example, that the applicant is not required to provide the information. Federal law prohibits the creditor from not only discriminating on the basis of this information, but also from discriminating on the basis of an applicant’s decision not to furnish the information.
Basing a Credit Decision Off of Prohibited Factors
Related to the first violation, the third violation occurred when lenders would make credit decisions based off of those prohibited characteristics—if they’d use age, receipt of public assistance, certain other income, etc., as a system of evaluating applicant creditworthiness.
In other words, if a certain characteristic of an applicant has nothing to do with a consumer’s ability to repay a loan, it should not be taken into account in a lending decision.
Taking Too Long to Notify a Denied Applicant
The last fair lending violation was a failure to notify an applicant in a timely way when their application was denied.
The violation has three prongs to it:
- Failure to provide sufficient information about an adverse action notification;
- Failure to appropriately notify an applicant in a timely way that action has been taken; and
- Failure to notify an applicant in a timely way that their application was incomplete.
Generally, a notification is required 30 days after receiving documentation. Be careful not to let the pendulum swing too far in another direction, however; BancorpSouth recently faced a hefty fine for rushing applications submitted by minorities. In an audio recording of a company meeting, a BancorpSouth manager told employees that applications from minorities and other members of protected classes must be “turned down” within 21 days, while white applicants were not subject to the shorter timeframe. While it is important to notify applicants of an application denial within 30 days, that is not an excuse to discriminate against lenders because of their race or other characteristic on the list of prohibited bases.
The CFPB mentioned other fair lending violations in the report, but it is clear that the agencies want to remind financial institutions that fair lending remains a top priority. Learning from mistakes made in 2015 and staying on top of activities that generated the most violations will keep history from repeating itself. And it will save your institution from facing fines and enforcement actions.
Click here for the complete text of the CFPB’s April report.