Topic: Fair Lending
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We received a loan application from a customer who previously defaulted on a car loan extended by our bank, twelve years ago. We had to repossess the car and obtain a deficiency judgment. The customer refused to pay the judgment, and we were able to collect it only after the customer later sold real property. Now the customer has clean credit, but based on the prior repossession and collection action, we plan to reject his loan application. Will this decision create any fair lending issues?
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No, we do not believe that rejecting a loan application for legitimate business reasons should create any fair lending issues, provided that your bank complies with its adverse action requirements. Regulation B allows a creditor to consider “any information obtained” in connection with an application for credit, provided that the information is not used to…
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We deny an applicant’s request to open a deposit account for two reasons: (1) if the applicant is outside of our market area, or (2) if we receive a negative ChexSystems report. Do banks deny deposit account requests for any other reasons?
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We do not have access to data on our members’ reasons for denying deposit accounts, but a few examples we have seen are denials for failing to meet certain qualifications for a particular account type (such as a minimum deposit amount or special qualifications for health savings accounts) and one instance of a denial due…
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Can we develop a money market account product that we do not advertise to the general public? We want to make it an exclusive offering.
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We believe that advertising and offering a money market account only to certain consumers, and not the general public, could present a risk of being considered a discriminatory unfair, deceptive, or abusive act or practice (UDAAP). While the Equal Credit Opportunity Act’s discrimination protections would not apply to money market accounts without credit features, the…
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Our bank partners with a third-party originator that refinances home mortgage loans. We underwrite these refinancings and purchase the loans from the third-party after the closing. Do we need to complete a “Tangible Net Benefit Form” when purchasing these loans, even though we are not considered the lender when the loan closes? Because we prepare closing documents on behalf of the third-party originator, should we be completing the “Tangible Net Benefit Form” for them? Also, would we be violating any law or regulation if we refinance a mortgage without completing a “Tangible Net Benefit Form” to remove a borrower due to a divorce? If this occurs, would we be protected if we keep the divorce decree on file to show that the refinance was justified?
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Because the Illinois Fairness in Lending Act applies to any entity that “assists” with a refinancing, we recommend working with your third-party originator to ensure that their refinancings result in a tangible net benefit to the borrower if you will be assisting in the refinancings and receiving related fees. The Illinois Fairness in Lending Act…
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A business customer would like to open a jumbo certificate of deposit (CD) and take out a loan secured by the CD. The borrower has requested a lower interest rate on the loan, in exchange for accepting a lower interest rate on the CD. Is this arrangement permissible? We do not advertise such arrangements but would be willing to offer the same terms to other qualified borrowers.
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We believe this arrangement is likely permissible, but we recommend addressing the fair lending concerns that could be raised by making a special arrangement for one borrower. There are very few limitations on interest rates charged by banks under Illinois law, provided they are agreed to by your customers in your loan agreements. The Illinois…
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A private group is developing a subdivision and has been unable to sell the new homes. The group wants to partner with us to offer incentives to promote more sales in the subdivision. Our bank wants to offer special terms to the first four customers who buy one of the new homes in the developer’s subdivision — such as balloon loans that would be interest-free for the first three years of the loan term. Would there be any fair lending issues associated with offering these loan incentives only to customers who want to buy homes in this subdivision?
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Yes, we believe there may be fair lending issues associated with offering favorable loan terms only to customers who buy one of the developer’s new homes, since the basis for qualifying for the incentive would be the geographic location of the property securing the loan. It appears that this incentive would violate the Illinois Fairness…
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Can you recommend any resources or guidance on using customer data for targeted marketing purposes? We have been using zip codes for targeted marketing promotions. Are there any limitations on data targeting that we should be aware of?
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Yes, when considering targeted marketing campaigns, you should consider whether any fair lending laws or UDAAP concerns will be triggered. We recommend carefully considering whether any targeted marketing campaign may be viewed as discriminatory or having a disparate impact on a protected class and thoroughly documenting your business reasons for engaging in such a campaign.…
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We want to partner with builders, sellers, and realtors to facilitate buydown subsidies that would temporarily decrease interest rates for our purchase mortgage loan borrowers. How should we disclose a buydown subsidy on the Loan Estimate (LE) and Closing Disclosure (CD)? We do not believe we need to include it on the LE, but it appears that we need to include it as a seller paid fee under Section H of the CD. Also, should we be concerned about potential fair lending violations since the subsidy is coming from a third party who may not offer it consistently to every borrower? Do you have any insight into how regulators view this type of product and what their expectations are?
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We believe a buydown subsidy should be disclosed as a “Seller Credit” in the “Summaries of Transactions” table on the CD. Also, we recommend conducting due diligence on any builders, sellers, and realtors before partnering with them to ensure that they will not be violating fair lending laws when offering the incentive. Regulation Z’s Official…
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We currently use the CFPB’s Bayesian Improved Surname Geocoding (BISG) spreadsheet when completing our annual fair lending review. When is the BISG spreadsheet updated, and where can we find the updated version? Do you recommend any other resources for fair lending reviews?
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The last time the CFPB updated its BISG proxy methodology was in April of 2017, and the updated BISG proxy methodology materials are available at the link provided in the resources below. Since the BISG proxy methodology materials are based on publicly available surname and geography data from the U.S. Census Bureau, we would not…
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One of our board members would like us to offer a discounted interest rate on loans to essential workers. Would such a discount cause UDAAP, Regulation B, and Fair Lending concerns?
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Yes, we believe that a promotion offering a discounted interest rate on loans to essential workers could present some potential fair lending risk, particularly if the program is found to have a disparate impact on a protected class. While it is possible to mitigate some of the fair lending and related risks with careful documentation…