Annual Fair Lending Update 2022
On December 6, 2022, the agencies broadcast their annual fair lending webinar, with different agencies giving updates on various topics and observations related to fair lending. As always, this webinar was very informative and focused not only on recent supervisory findings but also provided details on current focus initiatives.
HUD, the CFPB, and the FHFA all presented on the emerging battle against appraisal bias, with HUD noting that complaints related to biased appraisals have doubled. Appraisal bias is essentially the undervaluation of properties experienced by communities of color. A potential contributing factor presented by HUD is the overall lack of diversity in the appraisal profession, with over 97% of all appraisers being white. FHFA included convincing evidence of how serious this issue is with reference to their report on appalling commentary that the agency observed. A link to that release can be found here: Reducing Valuation Bias by Addressing Appraiser and Property Valuation Commentary.
In response to the inequities pervasive in this segment of the lending industry, the agencies have formed the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE). This agency’s goals include providing guidance to the appraisal industry, developing accountable mechanisms for the appraisal industry, preventing algorithmic bias in valuations, and developing a well-trained appraiser profession that better reflects the communities it serves.
Best practice suggestions for lenders to aid in the effort include promoting a strong fair lending complaint process, training, monitoring of third parties, and developing a solid Reconsideration of Value (ROV) process, which may include providing applicants with a notice of their rights early in the loan process. For more information on the ROV process, please see the following CFPB Blog post:
Mortgage Borrowers Can Challenge Inaccurate Appraisals Through the Reconsideration of Value Process
The next topic of the agencies was Special Purpose Credit Programs (SPCP) under Regulation B. An SPCP is a lending program designed to expand access to credit to individuals who would not normally have access to that credit or would typically receive it on less favorable terms. Over the past couple of years, the CFPB has issued guidance to clarify the requirements for setting up and administering an SPCP, including having a written plan that defines the class of persons for whom the plan is designed, an outline of standards and procedures, and an expiration or reevaluation date. For more information on this topic, see the Temenos compliance article: Is Your Special Purpose Credit Program Compliant?
Two agencies discussed recent fair lending violations. The NCUA provided an update on fair lending violations, noting that the majority of those cited relate to the content and timing of adverse action notices and notices of incompleteness. The FDIC discussed several matters the agency has referred to the Department of Justice related to redlining, third-party activity, and student lending.
The Federal Reserve Board unveiled a new data tool that produces census reports by MSA. This tool illustrates changes in volume for Majority Minority Census Tracts (MMCT) in an MSA. The tool is not currently active, but interested parties may visit the FRB website to sign up for status updates. Suggestions from the FRB to reduce redlining risk include comparing lending data to peers, reviewing branching patterns, and ensuring marketing and outreach efforts are focused within a lender’s entire assessment area.
Lastly, the U.S. Department of Justice discussed two redlining referrals they have recently settled. The first matter was against Trident Mortgage, and findings included discovery of emails that contained racial slurs and disproportionately low approval and lending rates to minority borrowers, with Trident’s peers generating twice as many loans in High Minority Census Tracts (HMCTs). Of Trident’s 53 branch locations, 51 were located in majority white areas, two were in MMCTs, and none were in HMCTs. No efforts were made to hire loan originators with ties to MMCTs, and no loan officers were assigned to solicit applications from MMCTs. All violations resulted in over $24 Million in fines and the added requirements to open four additional branches in majority minority neighborhoods, and at least four loan originators be assigned to those majority minority areas.