As the crackdown on discrimination and noncompliance with consumer protection laws gets into full swing, regulators are strongly urging financial institutions to pay special attention to 11 specific fair lending activities they say will help address the problem of bias.
Although the Department of Housing and Urban Development has not issued a similar fist, industry and government sources say HUD's fair lending investigators typically take activities like those spelled out in the list issued by depository institution regulators into consideration when they look for discriminatory lending by mortgage banking companies.
The fact that regulators have made it a point to "suggest" these 11 fair lending activities should not be taken lightly. These issues are going to be integral to how closely examiners scrutinize an institution and indicate what regulators will be seeking when they examine for compliance with consumer lending laws.
For institutions that come under investigation for discriminatory practices, these issues will be elemental to the examiners' search for inequitable lending.
Signed by the heads of the Federal Reserve Board, Office of the Comptroller of the Currency, Office of Thrift Supervision and Federal Deposit Insurance Corp., the regulators have given notice that they not only want institutions to work toward achieving the 11 objectives, but that they expect institutions to do this.
"It is clear to the agencies that more needs to be done to assure equal access to credit by everyone in the country. We expect all financial institutions to participate in this effort," the regulators said in their joint letter.
"We urge financial institutions to use their maximum creativity to design appropriate programs," the regulators said. "We especially urge consideration of the ideas listed on the appended sheet."
The 11 suggested fair lending activities as outlined by regulators are:
* Use of an internal second review system for consumer, mortgage and small-business loan applications that would otherwise be denied.
* Enhanced employee training that engenders greater sensitivity by financial institution management and employees to racial and cultural differences.
* Training of loan application processors to assure that any assistance to applicants in how to best qualify for credit is provided consistently to all loan applicants.
* Efforts to ensure that all persons inquiring about credit receive equal information and encouragement.
The attitudes of lending officials and personnel have become a hot button, as far as examiners are concerned, and are under special scrutiny. This first, crucial phase of making a loan is also where testers, including HUD's shoppers, are looking for hints of prejudice, discriminatory actions or other racial biases.
* Use of flexible underwriting and appraisal standards that preserve safety and soundness criteria while responding to special factor's in low- and moderate-income and minority communities.
* Efforts to encourage equal employment opportunity at all levels throughout the institution, including lending, credit review, platform and other key positions related to credit applications and decisions.
* Affirmative marketing and call programs designed to assure minority consumers, real estate sales agents and business owners that credit is available on an equitable basis; marketing may involve sustained advertising programs covering publications and electronic media that are targeted to minority audiences.
* Ongoing outreach programs that inform institutions about the minority community, its resources, credit needs and business opportunities.
* Participation on multilender mortgage review boards that provide second reviews of applications rejected by participating lenders.
* Participation in public or private subsidy or guarantee programs that would provide financing on an affordable basis in targeted neighborhoods and communities.
3 Use of commissions and other incentives for loan officers to seek and make safe and sound consumer and small business loans in minority communities.
In other developments, HMDA data showing disparities between the volume of lending and denial rates for white and black applicants will not necessarily prohibit rejection of bank applications that are pending before the Federal Reserve Board. This is so especially when the institution's CRA performance is at least satisfactory and there is substantive evidence of improvement in lending practices by the institution.
Such was the case in the matter of the Fed's recent approval of an application by First Tennessee National Corp. of Memphis to mergie its savings association subsidiary into its bank subsidiary.
The Fed said that "while [HMDA] show denial rates that vary according to race, the CRA performance examinations of [First Tennessee] found no evidence of illegal discrimination or other credit practices."
In addition, the Fed noted "that [First Tennessee] has taken steps to address the racial disparity in loan denial rates and improve its HMDA-related lending."
The Fed makes it clear in this case that HMDA data alone provide only a "limited measure of any given institution's lending in the communities that the institution serves."
The Fed further noted that "HMDA data have limitations that make the data an inadequate basis, absent other information, for conclusively demonstrating whether an institution has engaged in illegal discrimination on the basis of race or ethnicity in making lending decisions."