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On June 8, 2016 HUD announced a conciliation agreement with First Citizens Bank & Trust regarding Fair Lending allegations.  The essence of the allegation by HUD, is that the bank denied mortgage loans to minority clients at a disproportionately higher rate than white applicants.

How Did This Start?

HUD filed a complaint in 2011 after an analysis of the 2010 HMDA data.  So if you do not know what your HMDA data says about your company, it might be a good time to check that out.  When a regulator uses HMDA data, they not only look at your data, they also compare you to your peers.  Significant differences between what you do and what your peers do, can result in phrases like “denied mortgage loans to minority clients at a disproportionately higher rate than white applicants”.  This means that compared to their peers, HUD asserts that First Citizens denied minority mortgage loans a lot more than their peers.

So Now What Happens?

Well if you are a geek like me, you read the settlement and not just the press release.  I do this because it tells us all so much more about what is expected of lenders, so that companies can better prepare their practices in advance of a complaint.

Lessons Learned:

  1. The loan data at issue is from a bank that First Citizens Bank & Trust acquired. The lesson learned here, is that when you acquire another bank or mortgage company, you acquire their issues too.  Therefore, due diligence should be done to assess your fair lending risk on that acquisition; before you make the decision to acquire them!
  2. While the bank denies any wrong doing and believes that they sufficiently explained and justified statistical disparities, they agreed to enter into a “Conciliation Agreement”. Basically this means, “okay, we agree to concede and let HUD watch our practices and do the things they ask so that we don’t have to continue on with this complaint, because fighting it is really expensive!”  However, part of this agreement means that for the next 3 years, the bank must fulfill all of the obligations and requirements of the agreement, or the deal could be off.  I probably don’t have to tell you that the next three years of scrutiny are likely to be painful, as no one wants to be under the regulatory microscope for that long.
  3. The agreement doesn’t mean that HUD can’t investigate other complaints. This complaint was for 2010 data.  It’s 2016, so it’s possible that they have 5 more years of data to explore and potentially issue complaints.
  4. Employees are required to take 4 hours of Fair Lending training immediately, and annual training thereafter.
  5. 3 Mortgage Banker Market Specialists must be hired, with a focus on diverse lending.
  6. Offer a Special Purpose Credit Product, which is designed to meet the needs of diverse borrowers across the income spectrum.
  7. Make no less than 50 special purpose product loans and no less than 125 completed special purpose credit applications in specified counties.
  8. Make available to 501(c)(3) nonprofit organizations at least $140,000, specifically for those that provide services such as credit and housing counseling, financial literacy and other related programs targeting first-time homebuyers.
  9. Spend no less than $20,000 on marketing, advertising and outreach to residents in majority-minority census tracts in South Carolina.
  10. Conduct a minimum of 24 programs with a partner non-profit organization, or community group for individuals and small business owners.
  11. Document a more standardized, specific and objective set of underwriting guidelines for loans denied by AUS, which need to be manually underwritten.
  12. Based on the numbers that I calculated, this is going to cost them almost $500,000-$1,000,000 for staff, expansion, marketing, training, outreach programs and a Special Purpose Product. This does not include the attorney costs during the oversight period.

The regulators that come to our industry meetings say repeatedly; pay attention to what happens to others and put plans/actions in place so that it doesn’t happen to your company.  By now, they have given us plenty of tutorials from settlements and agreements regarding what we need to do.  The question is what lenders will continue to be content learning the hard way and which ones will adapt?

If you would like to read the Conciliation Agreement, I’ve attached the link below.

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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