Fair Lending, ECOA et al.

Fair lending has reared its head more than once in the 1900's and promises to be a front burner topic in the coming decade. In the 1990's, fair lending enforcement has reached an all time high. There is no reason to expect this to change and every reason to expect this to continue. Treating people fairly is simply too important to the American system to turn our backs on it.

Two aspects of fair lending are likely to be different in the coming decade. First, the nature of the issues we look at will be broader and include more types of credit transactions and activities. Much of the fair lending enforcement activity in the twentieth century was driven by the Fair Housing Act. As a result, investigations and enforcement actions have centered on housing-related issues. From the lender's perspective, the enforcement has involved mortgage lending.

In addition, the prohibited bases at the core of the cases has generally involved the prohibited bases in the Fair Housing Act, with particular emphasis on race and ethnicity.

In the past several years, discrimination issues covered by ECOA have become the focus of enforcement attention. We are already seeing trends that broaden the scope of fair lending enforcement to lending practices such as small business lending, indirect lending, and installment lending.

We can expect these trends to continue, The future will bring more challenges to lending practices based on gender, marital status and age. Additional monitoring data isn't needed to investigate discrimination on these bases.

More types of lending will be targeted for evaluation. Investigations have already involved non-mortgage lending. Practices in offering and underwriting consumer loans, issuing credit cards and maintaining credit card programs are being looked at. Lending to small businesses is a stated priority for the Department of Justice.

Second, the practices used in lending are changing in ways that dictate changes in investigation procedures and techniques. Lending used to be a personal interview and a decision made by a loan officer based on information and "experience." Increasingly, credit applications are submitted without personal contact between lender and customer. And decisions are made using tools such as credit scoring rather than loan officer experience.

Changes in how loans are made will trigger changes in how fair lending is evaluated. We are seeing a gradual trend away from evaluating customer treatment toward evaluating the credit evaluation and assessing the demographic impact of techniques used, such as credit scoring. The very tools that we use to make decisions will form the foundation of the examination.

Using the new decision-making tools will direct attention to a wider range of credit decisions and credit types. The tools will direct fair lending investigations toward those types of credit that are supported by automated decisions. Credit decisions for indirect lending and credit scoring are logical targets.

Because the risk analysis techniques lend themselves to rapid and accurate analysis, investigators will look more closely than ever at underwriting criteria and policy overrides. There are two things to look at here: whether the criteria and the use of decision systems involves discrimination such as disparate impact, and whether the criteria or overrides indicate a pattern of discrimination.

Marketing
How lenders reach customers will always be a fair lending issue. The ability of any potential customer to learn about the products is fundamental to supporting a fair lending program. This is also reflected in the CRA service test. The question is whether the bank is in the right places and responding to the credit and service needs of its community.

Traditionally, we have looked at marketing, including the design and media placement of advertisements. Electronics may dramatically change that. The Internet and electronic banking services will add a dimension to the question of marketing and affirmative outreach to customers. We can expect attention to be given to how lenders reach potential customers in low- and moderate- income groups who may not have ready access to computers, modems, and any other equipment that would be needed for electronic banking.

ACTION STEPS

Study your market area and identify any prohibited basis that should be of concern to you. Look specifically at issues such as familial status, population age, and gender.
Consider how the credit decision-making process in your bank is changing. Look at the new procedures and credit decision tools may affect your application population.
Think about how your credit products are designed, marketed, and supported. Put this in the context of your market's demographics and consider any fair lending impact.
Put your CRA program and fair lending issues side by side. CRA concerns such as service and demographic analysis should feed into and support your fair lending efforts.
Include new examination techniques in your regular self assessments.