An Opportune Time For Financial Institutions to Review Their Fair Lending Procedures

Bilzin Sumberg
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Bilzin Sumberg

At the beginning of his term, President Biden declared that his administration would make it a policy to eliminate “racial bias and other forms of discrimination in all states of home-buying and renting.” Recently, this policy statement has manifested itself in regulatory proposals and enforcement actions against a national banking association in what is the largest fair lending enforcement action in the past few years.

In late August, the Office of the Comptroller (“OCC”) entered into a consent order [1] with a national banking association, Cadence Bank, over what it alleged were violations of the Fair Housing Act during the 2014-2016 time period. The OCC alleged that the bank failed to provide equal access to residents seeking first-lien mortgage loans in majority-minority (predominantly black) census tracts and Hispanic neighborhoods in the Houston area. Without admitting or denying liability, the bank agreed to pay $3 million in civil penalties.

Notably, in making these allegations, the OCC analyzed mortgage-lending activity in the Houston area and made statistical comparisons with lending activity of other banking associations. It looked at the Bank’s number of branches in that area and the number of mortgage loan officers (MLOs) working at branches in the area versus the number of MLOs in other areas outside of Houston.

Cadence Bank entered into a separate settlement with the Department of Justice to resolve allegations of redlining.[2] Though these were separate settlements, the actions of the agencies were part of a coordinated effort. The DOJ settlement requires the bank to invest over $5.5 million to increase lending opportunities for residents in the affected areas.

Last month,  the OCC also proposed rescinding certain updated fair lending rules as the agency begins work on drafting  new regulations.[3] Under the proposal, the OCC would go back to the previous 1995 regulations for the Community Reinvestment Act (“CRA”), a fair lending law enacted in 1977. The stated purpose of an updated CRA would be to ensure that banks are doing as much as they can to support lower-income communities.

The CRA requires the Federal Reserve, the FDIC and OCC to encourage financial institutions to help meet the credit needs of their communities, including low and moderate-income neighborhoods. It also requires these regulators to maintain a CRA site that provides information about the financial institutions they supervise as well as their CRA ratings and performance evaluations.

Also last month,  the Consumer Financial Protection Bureau (CFBP) announced a new proposed rule to Section 1071 of the Dodd-Frank Act to require financial institutions to collect and report to the CFBP information on applications for credit for small business, including businesses owned by women and minorities.[4] Specifically, it would require lenders to report information about the amount and category of small business credit applications, demographic information such as race, sex, and ethnicity of the principal owners of these businesses, and the process used to evaluate and approve each application. This rule would apply to a number of credit products including term loans, lines of credit, credit cards and merchant cash advances. The proposed rule is in its comment stage.

Given this administration’s focus on addressing inequities in consumer finance, financial institutions should imminently take action, if they have not already, to evaluate their lending policies. Inevitably, these proposals, especially the amendment to Section 1071 of the Dodd-Frank Act requiring financial institutions to collect and maintain demographic information, will facilitate a larger number of enforcement actions against institutions believed to employ discriminatory lending decisions. Therefore, now is a good time for financial institutions to ensure that their credit products and lending processes do not result in unfair or disparate treatment of  protected classes of borrowers and customers.

[1] Consent Order: https://www.occ.gov/static/enforcement-actions/ea2021-030.pdf .
[2] DOJ settlement announcement: https://www.justice.gov/opa/pr/justice-department-and-office-comptroller-currency-announce-actions-resolve-lending.
[3] https://www.reuters.com/business/finance/us-banking-regulator-proposes-removal-updated-fair-lending-regulations-2021-09-08/
[4] Proposed rule: https://files.consumerfinance.gov/f/documents/cfpb_section-1071_nprm_2021-09.pdf.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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