Group of professionals discuss finance

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Banking and Finance Law Daily, July 1, 2013

Federal Reserve publication focuses on fair lending, adverse action notices

By Richard A. Roth, J.D.

The Federal Reserve Board has been trying to make the fair lending portion of its community bank examinations both clearer and more useful in recent years, according to Fed Governor Elizabeth A. Duke. In a question-and-answer for the Fed’s second quarter 2013 Consumer Compliance Outlook®, Duke said the Fed has improved its communication with bank management and made the Fair Lending Examination procedures more detailed. The Fed also provides a better description of issues that arise from statistical analysis of electronic data to reduce banks’ need to rely on outside consultants.

Duke spoke specifically about the use of disparate impact theory and about a recent Consumer Financial Protection Bureau bulletin addressing indirect auto lending. Neither of these is new territory for the federal regulatory agencies, Duke asserted. The Department of Housing and Urban Development included the disparate impact theory—under which conduct can be considered discriminatory if it has a discriminatory effect even if it has no discriminatory intent—in a regulation adopted nearly 20 years ago. It also is included in the interagency fair lending exam procedures.

Likewise, the potential for fair lending violations in indirect auto lending—when a lender buys loans originated by an automobile dealer—has long been considered by Fed examiners, Duke said. CFPB Bulletin 2013-02 called attention to the risk that can arise from a bank’s own policies, but did not announce any new concerns.

ECOA v. FCRA. A separate article looks at the relationship between the adverse action notice requirements imposed by the Equal Credit Opportunity Act and the Fair Credit Reporting Act. Both require creditors to notify consumers if a credit-related application is not granted as requested, but the acts have different purposes that result in different scopes and requirements.

The ECOA and its regulations are intended to protect both consumers and businesses from illegal credit discrimination. They do so by requiring creditors to explain why an adverse action was taken. On the other hand, the FCRA and its regulations are intended to inform consumers when adverse action was taken on a credit, insurance, or employment application based on a credit report. Nevertheless, a combined notice form often can be used, the article says.

As a starting point, the differences mean that the two laws have different definitions of “adverse action”:

  1. Under the ECOA, an adverse action generally is a refusal to grant credit under the requested terms, a termination or unfavorable change in account terms that does not have wide-spread effects, or a refusal to grant a requested increase in a credit limit.
  2. Under the FCRA, an adverse action generally also includes a denial, increased charge for, or other unfavorable change in insurance costs or coverage; an unfavorable employment-related decision; an unfavorable action relating to a government license or benefit; or an unfavorable action after a review of a consumer’s existing account.

The two laws also impose different notice requirements, the article continues. For example, the ECOA requires only that the primary applicant of a group needs to be notified of an adverse action, while the FCRA requires that all consumers must be notified. Moreover, if the adverse action was based on a consumer’s credit score, each consumer is to be told of the information related to his score but is not to be given information on other applicant’s scores. The ECOA requires that adverse action notices be given to consumers in writing; the FCRA permits oral notices as well.

Different notice content requirements are imposed by the two laws as well, according to the article. Under the ECOA a creditor is to disclose up to four principal reasons for the adverse action. The FCRA requires that additional information be provided if a consumer’s credit score was considered, including the consumer’s score, the range of possible scores, and all the key factors that affected the score. Disclosing the FCRA key factors will not necessarily satisfy the duty to disclose the ECOA principal reasons, the article makes clear.

Webinar Q&A. The Consumer Compliance Outlook® also provided a series of questions and answers generated by a recent webinar on fair lending. These included describing the specific factors that Fed examiners use in fair lending pricing and underwriting reviews.

Risk factors in a pricing review can include:

  1. pricing that treats applicants differently on a prohibited basis or is likely to have a disparate impact;
  2. the existence of broad discretion in loan pricing;
  3. risk-based pricing that is not based on objective criteria or that is applied inconsistently;
  4. financial incentives for loan originators to charge higher prices;
  5. the absence of clear documentation for pricing decisions; and
  6. consumer complaints.

The risk factors in an underwriting review are very similar, the Q&As note. Vague, unduly subjective, or inconsistently applied underwriting criteria was described as a specific risk factor, as was basing loan originator compensation on factors such as loan volume.

The Q&A also addressed a specific issue that has recently arisen—requiring Social Security Disability Insurance recipients to provide a doctor’s letter to show that the income is likely to continue for the long term. While loan investors generally require that loans be based on long-term, stable income, requiring a doctor’s letter demonstrating that the SSDI payments will continue could discriminate illegally on the basis of the applicant’s receipt of a government benefit, the Q&A warns.

RegulatoryActivity: ConsumerCredit EqualCreditOpportunity FairCreditReporting

Banking and Finance Law Daily

Introducing Wolters Kluwer Banking and Finance Law Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.