Fair lending is on NCUA’s list of supervisory priorities again for 2024. Similar to other years, it falls under the umbrella of consumer financial protection. Areas of focus under this umbrella are based on things such as recent regulatory changes, trends in exam findings and violations, input from NCUA examiners and field staff, consumer complaints, credit union trends and violations, emerging issues, and Federal Financial Institutions Examination Council (FFIEC) areas of common interest.
As you know, it is unlawful for a creditor to discriminate against an applicant in a credit transaction based on a protected characteristic such as race, color, national origin, religion, sex, familial status, or disability under federal fair lending laws and regulations. NCUA’s specific fair lending focus for 2024 includes credit unions’ policies and practices related to redlining, marketing, and pricing discrimination.
NCUA includes fair lending reviews as part of the Risk Focused Examination (RFE) program and the Small Credit Union Examination Program (SCUEP). NCUA conducts fair lending examinations in accordance with the FFIEC Interagency Fair Lending Examination Procedures. A select number of federal credit unions are chosen each year for a fair lending examination; this year the number will likely fall between 50 to 60 credit unions as indicated by NCUA staff during its February 8th webinar covering supervisory priorities.
Also, during the webinar, NCUA staff mentioned that the review of redlining discrimination risk will be limited to selected federal credit unions with “community charters or multiple common bond credit unions with at least one underserved area” in their fields of membership.
The definition of redlining in FFIEC’s Exam guide is “a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.” Reverse redlining is “the practice of targeting certain borrowers or areas with less advantageous products or services based on prohibited characteristics.”
FFIEC’s Exam guide offers the following note on redlining:
“NOTE: It is true that neither the Equal Credit Opportunity Act (ECOA) nor the Fair Housing Act (FHAct) specifically uses the term “redlining.” However, federal courts as well as agencies that have enforcement responsibilities for the FHAct, have interpreted it as prohibiting institutions from having different marketing or lending practices for certain geographic areas, compared to others, where the purpose or effect of such differences would be to discriminate on a prohibited basis. Similarly, the ECOA would prohibit treating applicants for credit differently on the basis of differences in the racial or ethnic composition of their respective neighborhoods.”
The FFIEC’s Exam guide offers the following explanations of risk factors to analyze as potential indicators associated with redlining:
- an institution fails or refuses to extend credit in certain areas;
- an institution targets certain borrowers or certain areas with less advantageous products;
- an institution makes loans in such an area but at a restricted level or upon less-favorable terms or conditions as compared to contrasting areas; or
- an institution omits or excludes such an area from efforts to market residential loans or solicit customers for residential credit.
For marketing discrimination risk, indicators of potential disparate treatment when marketing certain products could include indicators (there are additional indicators in the FFIEC Exam guide), such as:
- Advertising patterns or practices that a reasonable person would believe indicate prohibited basis customers are less desirable.
- Use of marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the institutions assessment or marketing area that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area.
- Using mailing or other distribution lists or other marketing techniques for prescreened or other offerings of residential loan products that explicitly exclude geographies within the institution’s marketing area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.
When evaluating pricing policies and practices for pricing discrimination risk and credit-decision standards for determining whether such decisions and other terms and conditions are applied to borrowers without regard to a prohibited basis, the following should be considered (among other things):
- Applicable pricing policies, risk-based pricing models, and guidance for exercising discretion over loan terms and conditions.
- Descriptions of any compensation system, including whether compensation is related to loan production or pricing.
As credit unions begin to review their practices and procedures, I wanted to highlight portions of information available to you in the FFIEC’s Exam guide. The information in this blog post clearly is not an exhaustive list of the guide’s risk indicators when used by examiners for a fair lending examination. Credit unions should review the FFIEC Exam guide in its entirety to ensure compliance with federal fair lending laws and regulations – particularly the areas of NCUA’s fair lending focus (redlining discrimination risk, marketing discrimination risk, and pricing discrimination risk) for this year. The links to FFIEC’s resources are below as well as additional NCUA fair lending resources.
I hope this helps!
Resources:
FFIEC Interagency Fair Lending Examination Procedures (2009)
FFIEC Appendix to Fair Lending Examination Procedures (2009)
NCUA Fair Lending Compliance Resources