Fair Lending Alert: Pricing

Fair lending enforcement doesn't sit still. New issues and new interpretations of the Fair Housing Act and the Equal Credit Opportunity Act emerge with a relentless regularity.

The Department of Justice is a lead agency in the enforcement of fair lending. DOJ has authority to bring cases under the Fair Housing Act and the Equal Credit Opportunity Act. The Federal Trade Commission is also actively investigating a number of lenders for violations of the Equal Credit Opportunity Act. These agencies do not have an examination system through which compliance can be reviewed and verified. They enforce by example.

The law enforcement approach of an agency such as the Department of Justice or the Federal Trade Commission is to bring a case which establishes their interpretation of the law or identifies a specific practice as a violation of the law. The case is designed to make an example of the creditor and establish the enforcement principle. Once this is done, they move on to other creditors and other practices.

One result of this enforcement technique is that one creditor bears the brunt of the enforcement action while others learn from it. Another result is that the agencies are constantly evaluating the credit business and considering new enforcement theories.

Because banks are examined regularly, they must maintain compliance with known interpretations and existing case law while also looking ahead to anticipate new interpretations. Banks must constantly adjust their lending practices and compliance programs, including self assessment.

In the present fair lending enforcement environment, it is particularly important for banks to look ahead, to understand and anticipate the fair lending issues of next month and next year. The issue that is emerging now is the treatment of customers in setting prices. This includes the purchase price of the goods and the price of credit.

The Department of Justice and the Federal Trade Commission are presently investigating cases based on discriminatory pricing and overages. Several of the investigations involve car financing. One or more cases involve overages on mortgage loan pricing.

This new direction in the government's fair lending investigations make it imperative that banks adjust their self-assessment programs accordingly. It is now necessary to look at more than decisions made on mortgage loans. Your self-assessment program should account for loan rates and other elements of the cost of the loan. In addition, your self-assessment procedure must include more than mortgages. At a minimum, you should review home improvement loans and automobile loans. If your bank purchases car loans, the loans purchased should be carefully audited.

In consumer installment lending, the government monitoring information on the applicant's race and sex is not available. An investigator can only make assumptions about gender based on other information in the file. Key information comes from applicant names. It is permissible, when conducting an audit or investigation, to make assumptions about the gender of the applicant based on the applicant's name. Follow several rules on making gender assumptions. First, do not do this before a credit decision is made. Second, keep the information in audit papers only. Do not make notations in the credit file. The credit file may be referred to later for a credit-related purpose, such as refinancing or renewing the loan.

Make reasonable assumptions and keep a record of what your assumptions were. For example, it is reasonable to assume that "Mary" is a female applicant and that "John" is a male applicant. "Pat" is not as clear. Here you have to establish a method. One method would be to assume that two Pats are female and one is male, on the thesis that Patricia is twice as common as Patrick.

Another method would be to look to other information in the file that might indicate gender. Information in the file such as the applicant's middle name, or attendance at an all male or all female school would also identify gender. Carrying the analysis this far would be more work and would also require a great deal of documentation.

A third method would be to create a separate category of androgynous names to analyze separately or to apportion to the male and female groups.

You can use a similar process with surnames to identify some ethnic groups. Hispanic and Asian surnames usually indicate the ethnicity of the applicant. Other groups, such as African Americans, cannot be identified by surname.

These methods will not be completely accurate. Any conclusions you draw in your audit must take into account that the groupings are based on assumptions that necessarily contain inaccuracies.

ACTION TRAINING

Review your bank's loan products to determine how pricing and overage practices could have an impact on your bank. Identify loan products that should be included in a fair lending review.
Meet with your loan officers to identify loan brokers or indirect loan products that should be evaluated.
Review your self-assessment procedures to determine whether the procedures measure current concerns on pricing, particularly by gender and marital status.
Develop and add self-assessment procedures to assess whether the bank treats customers equally on pricing.
Compare loan programs, such as direct loans and indirect loans for the same consumer purpose.
Determine whether the terms are comparable or whether a consumer using one loan product such as a direct car loan will obtain different terms than if the consumer had applied differently, such as through the dealer.
For each loan product that has pricing determined by outside parties (loan brokers, car dealers) analyze credit decisions by each outside party and compare the results to the bank's credit standards.