Fair Lending Reform
The LBA has made an effort to highlight and advocate reform in fair lending examination and enforcement of alleged violations. My attention to this is due to conversations with Louisiana bankers and the experience they communicated to me about their fair lending examinations. I have another meeting with a Louisiana bank later this month to talk about their experience. Through these conversations, I am convinced that the examination process in its enforcement of the disparate impact doctrine is flawed. The standard of “pattern and practice” in determining an alleged fair lending violation has been stretched to be meaningless with respect to community banks. It is not even worth considering that Wall Street banks are held to the same standard, as it’s inconceivable that a few loans could be singled out through their exam, or that they could be referred to the U.S. Department of Justice in such an instance. Community banks appear to held to a higher standard.
When writing or speaking about this, it’s always possible those listening will misinterpret this discussion to somehow mean that it’s really about permitting unfair lending. We all know community banks are focused on making good loans and helping their communities grow and prosper. Purposeful exclusion of any part of their community is self-defeating.
The LBA has had several approaches on this issue. On flood insurance, we tried to get the interest of others on the idea that bankers could safely be trusted to determine which of their borrowers should have flood insurance on properties outside the flood hazard zones without fear of violating fair lending. After the flooding in 2016, when so many areas outside of the flood hazard zones were flooded, we had many conversations about permitting bankers increased leeway on requiring flood insurance. The results would increase the safety and soundness of the bank, position the community to recover better and add needed premium dollars to the NFIP. The fair lending concern makes this a big lift.
Another approach was to amend federal law that currently requires federal banking agencies “shall refer the matter to the Attorney General whenever the agency has reason to believe that one or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of section 1691(a) of this title.” The use of the word “shall” apparently gives little or no discretion to the federal banking agencies. I know, through a conversation with a person that worked at one of these federal banking agencies, that referrals are made that the agency staff believe should not be done as the alleged violation did not rise to the level to warrant such a referral. But under current law, they shall, which sets off the series of expensive and anxiety producing months or years. Generally, they get kicked back to the banking agency anyway. We would like to change “shall” to “may”. The banking agencies have the authority to enforce and resolve the issue in a more timely manner and with the same result.
The other approach, or in addition to the above, is to legislate the meaning of “pattern and practice” as used to define an alleged fair lending violation. Our thought and in consultation with many attorneys and our national association partners on the language is to establish de minimis number of alleged loans in violation of fair lending that could result in a referral to the Department of Justice. Some meaningful number that could more represent a “pattern and practice”.
Recently a new tack has been initiated: to prohibit or severely restrict the referral of any community bank to Department of Justice. My experience with Louisiana bankers in a fair lending exam is the examiners may focus on a very tiny number of loans that cannot be considered a “pattern or practice” by a common sense standard. At our request, Sen. John Kennedy has written a letter to the federal bank agencies, along with Sen. Thom Tillis of North Carolina, requesting the data on community bank referrals to Department of Justice. I want to know the percent of banks referred that are later kicked back to the banking agency for resolution. If this is a high percent, then it raises the question as to why these referrals are even made since the banking agency is the final arbiter anyway. The primary concern for policy makers is getting to a remedy for any violation. If that can be done, and is being done, through the banking agencies, then why not eliminate Department of Justice.
One focus of mine is the general wear and tear bankers experience today in their work, what I have heard some refer to as ‘banker fatigue’. If community bankers know they can’t be referred to Department of Justice over an alleged fair lending violation, that would be a tremendous weight lifted, and the bank and the banking agencies can quickly get to a remedy and move on.
Finally, I am pleased to report that a joint letter, with signatories that include American Bankers Association and Independent Community Bankers of America, was sent to Attorney General Jeff Sessions requesting a meeting to discuss “the Department’s approach to enforcement of fair lending laws. We believe that this Administration has an opportunity to align fair lending policy with Supreme Court precedent and address constitutional concerns regarding the consideration of race in decision-making. Indeed, in a fair lending matter pending in the Northern District of Illinois, the Department recently espoused a concerning position of the previous Administration, which the Court then adopted. Other deadlines demanding the Department’s views are approaching.” The letter continues “the actions of the Department to date appear to further the prior Administration’s policy, and with other court deadlines fast approaching, we ask that you allow us to represent our concerns to you before other decisions are made.”
Fair lending, like the Community Reinvestment Act and Bank Secrecy Act, and other items, need reform. Let’s hope we can see some progress.