“That’s a bank issue, not a mortgage banking issue.” I hear that statement over and over and I suppose until more non-financial institutions make the headlines for redlining, I will continue to hear that statement. While it is true that banks have been under the microscope of redlining far longer than mortgage bankers, it is any lender’s concern. If your company does mortgages, it will be subject to redlining and disparate impact review. Lender compliance on this issue is heating up fast and is being pushed hard by the CFPB and the DOJ.
What is Redlining? ECOA and FHA prohibit creditors from discriminating on the basis of, among other characteristics, race, color, and national origin in their residential mortgage lending practices. ECOA and its implementing regulation, Regulation B, make it illegal for a creditor to discriminate against an applicant in any aspect of a credit transaction on the basis of, among other characteristics, race, color, and national origin. ECOA and Regulation B also prohibit any statements, acts, or practices that would or could discourage on a prohibited basis a prospective applicant from applying for credit. Clear but fuzzy enough that it gives the regulators a lot of latitude!
So what have we learned from the recent Hudson City Settlement?
- Joint investigations are becoming more popular. In other words, the agencies are teaming up and sharing information about their individual findings. In this case, the prudential regulator is the OCC, yet the complaint was filed by the CFPB and DOJ.
- Your company needs to demonstrate how they review the penetration in the MSAs they choose to lend in. Then from that review determine how they will diversify within an MSA. If their lending pattern is like many mortgage bankers, then they may see that they are mainly lending in well-served markets vs. under-served markets. Why? This was never a big issue for mortgage lenders….but it is now!
- If your company is a wholesale lender (like the Hudson City practice) and they work with brokers that only serve the well-served populations or market in the well-served populations that’s going to be an issue. 80% of Hudson’s broker business was outside of under-served markets. What are your company patterns?
- Fair lending policy that is firmly backed by an action plan also determines success. It’s not enough to have canned policies on fair lending. It has to be backed up with an executed action plan that demonstrates incremental improvements.
- Where is your company marketing? Does this marketing reach under-served markets? Is your company still bold enough (or perhaps a little crazy) to do MSA agreements, and are those agreements in well-served real estate offices AND under-served real estate offices?
- Does your company have established partnerships with the community based organizations in the under-served markets?
- Does your company have personnel that market the under-served markets? Yes, the loan amounts, conditions on the files, etc. may be a little more challenging, so don’t expect success unless you are willing to pay an originator a decent salary in addition to a commission to focus on the under-served markets. It seems to me that this is much less expensive than a $5.5 million civil money penalty and $25 million in loan subsidy programs. And let’s not forget the hiring of third-party consultants, two new full service branches and a few other gems that will cost Hudson a boat load of money!
The goal of any lender should be to demonstrate rock-solid oversight on redlining, which is not an expensive proposition! This should also be done daily and real-time! Demonstrating that your company watches for redlining, creates an action plan and outlines how issues are cured, makes regulators happy and then they go on to the next lender, versus digging deeper into your practice!
To Read The Settlement CLICK HERE!
