Overt Discrimination Openly or blatant discrimination on a prohibited basis Expressing a discriminatory preference, even without acting on the preference –“We don’t like to make loans to------but” –Credit limits based on age
Disparate Treatment Different treatment based upon one of the prohibited factors Intent does not matter - More subtle Lender cannot provide a credible and legitimate nondiscriminatory explanation Occurs with marginal borrowers Red-lining and Reverse Red-lining
Disparate Impact Lender applies a policy or practice uniformly to all credit applicants, BUT Creates an adverse impact on applicants from a protected class Example - loan minimums, gross income Manifest business necessity has to be established - “Prove it”
Predatory Practices Unaffordable loans based on assets rather than ability to pay; “Flipping” Inducing repeated refinances - high points, fees; AND Engaging in fraud or deception Taking advantage of “unsuspecting or unsophisticated” borrowers.
Household International May Advocacy group pickets Nationwide protests - predatory practices –Targeting low-income borrowers –Exorbitant rates, overpriced credit insurance –Misleading terms Urging investors to sell their stock
Ford Motor Credit December 1999 Disparate treatment Discrimination against unmarried co- applicants - not counting both incomes Paid fine of $650,000 to federal government
Capital City Mortgage 1998 Predatory practices –reverse redlining –targeted African-American communities –high rates, fees, misleading borrowers Products designed to fail - makes housing unavailable Discrimination based on race
Hot Topics Predatory practices Subprime lending Credit Scoring
Subprime Lending Important lending product Enhances and meets the needs of borrowers with impaired credit; Reduced repayment capacity - –credit report –debt-to-income ratios
Subprime gone bad Vulnerable borrowers - lean resources Measurements of subprime category applied after loan decision; Steering to subprime products; High rates - High pre-payment penalties Use of non-standard ARM indexes
Avoiding Fair Lending Problems Strong written loan policy Strong underwriting standards –consistency, level of assistance, overrides –Policy V. Practice Fair lending training –at least annually for all lenders, front line Second review process - denials
Consequences of Noncompliance Civil Action Class Action Reputation risk Regulators Dept of Justice HUD
The Future What do we know and where to go from here? Proposed revisions to Truth in Lending and RESPA Closer scrutiny of consumer and commercial loans Consumer loans Vigilance - what is your bank doing, where, with whom and what it means.
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