In the March 2021 issue of FDIC Consumer Compliance Supervisory Highlights consumer compliance issues identified in 2020 examinations included Fair Lending. The FDIC conducts a fair lending review as part of every consumer compliance examination. In cases when there is reason to believe that a creditor is engaged in a pattern or practice of discrimination in violation of ECOA, the FDIC is required by law to refer the matter to the Department of Justice (DOJ). In 2020, the FDIC referred fair lending matters to the DOJ to include:
An institution was originating unsecured loans through third party partners. In general, the institution contracted with a third party to operate a website through which applicants could apply for credit directly.
Examiners reviewed the underwriting criteria and discovered that these criteria included the prohibited bases of age and the receipt of public assistance income in its decision-making process. If the applicant was under the age of 30, the institution would deny the application. Separately, the applicants who applied on the website had to select their source of income from a dropdown menu. The menu included options such as: “employment,” “social security,” and “pension.” If the applicant chose any option other than “employment,” the application was denied.
Another case involved an institution that used credit-scoring models developed by a third party to offer consumers unsecured lines of credit. One credit model assigned less favorable scores based on whether the applicant relied on public assistance income as compared to income from employment. Collectively, this resulted in applicants being treated differently on the prohibited bases of age, sex, and the receipt of public assistance income.
In another fair lending matter, examiners identified a policy that provided a different pricing method for married joint applicants than for un-married joint applicants. If the applicants were married, the institution’s policy stated that the loan officer should use the highest credit score of the two applicants to price the loan. If they were unmarried, loan officers would use the primary applicant’s credit score. The institution considered the main applicant to be the person listed first on the credit application.
The institution had a tiered scoring system with higher loan rates for applicants with lower credit scores. The policy provided borrowers with higher credit scores with lower rates. Because married applicants were priced using the highest credit score and unmarried applicants using the “main” applicant’s score, the effect of this policy was to price applicants differently on the prohibited basis of marital status. The FDIC identified unmarried co-applicants who received less favorable pricing than similarly-situated married applicants because of the institution’s policy.
Including a prohibited basis for discrimination in a credit policy presents a significant risk of violating a federal fair lending law. Financial institutions should consider regularly reviewing credit policies to ensure ECOA and Regulation B permit such consideration. Financial institutions should consider the following steps to help further mitigate fair lending risks:
- Maintain written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy; and
- Review any filters or other criteria used for online leads, website applications, or credit-scoring models.