Managing Fair Lending for IMBs

(l-r) MBA Vice Chair Mark Jones; Jonice Gray Tucker and Mitch Kider speak at MBA Independent Mortgage Bankers Conference in Nashville Jan. 25.

NASHVILLE, Tenn.—Independent mortgage banks know full well the importance of risk, whether it’s developing business strategies—or preparing for Fair Lending examinations.

“Fair Lending risk is one of the biggest challenges facing our industry,” said MBA Vice Chair Mark Jones, speaking here at the MBA Independent Mortgage Bankers Conference.

“Fair Lending is one of the cornerstones of the Biden Administration’s civil rights agenda,” said Mitch Kider, Managing Partner with Weiner Brodsky Kider PC, Washington, D.C. “We’re seeing a lot more examinations and enforcement actions The Biden Administration is not employing tunnel vision on this topic—they are looking anywhere and everywhere for possible Fair Lending issues.”

Jonice Gray Tucker, Partner with Buckely LLP, Washington, D.C., agreed, but cautioned the issue has much broader reach. “There are a lot of players in this space, which actually started during the previous [Trump] Administration, where there was a perception of a pullback on regulatory issues,” she said. “So, you are seeing a lot of activity as well at the state level, with states attorneys general stepping into fill what they saw was a regulatory void during the previous administration.”

Kider said minority borrowers have undeniably suffered under Fair Lending violations, and that lenders will have to improve their operations to avoid Fair Lending issues in the future. “It’s going to force us to be more creative so that we can analyze credit more accurately,” Kider said. “We are already doing that, and I think AI is accelerating that process.”

The CFPB has stated, emphatically, that it will be focusing on this issue in the future. “And we have to be ready for that,” Kider said.

And it’s not just the CFPB, Gray Tucker said. “HUD is also kicking the tires,” she said. “And the Department of Justice, which is an investigative entity, can start their own investigations and go in directions we have not seen before.”

A number of Northeastern states have aggressively launched investigations as well. “And they are joining with the federal government in some cases.”

“States are not going to back off,” Kider said. “When states initiate actions, they are almost always conferring with the CFPB. And if you end up resolving an issue with a state, you’re almost certainly going to be resolving it with the CFPB as well.”

Servicers are not immune, either, Gray Tucker said. “Fair Servicing is about a lot of other issues, such as loss mitigation,” she said. “From a servicing standpoint, you have to think about your compliance management system, from the top on down. We are in an environment where things are changing very rapidly.”

“It starts with a good compliance management system,” Kider said. “It’s not there to react to problems—it’s testing and accountability on a proactive basis, to find out you’re your system works, to identify problems and to fix those problems before the regulators do…you don’t want to find out about your problem from the CFPB—you’re better off letting them know what happened based on what you found.”

“Regulator exams are about trust,” Kider added. “It’s about whether your systems can be trusted and whether or not the regulator can trust you.”

One of the primary areas of focus is redlining, Kider said. “Redlining is a concept that goes back to the 1950s; it’s about discrimination based on property. Lenders had these color-coded maps as to where the riskiest places to lend were—and they happened to be largely in minority areas.”

Today, Kider said, “Redlining has morphed. The CFPB has seen what it thought was a form of redlining. And while the Fair Housing Act covers all aspects of a loan, the CFPB works within certain limitations—it starts with a statistical data analysis of your lending patterns and your geographic distribution of those patterns. They want to know how you’re performing vis a vis your peers in making loans in certain areas. And ‘peer’ used to be defined as any lender that makes loans to customers within 50-200 percent of your volume. Today, ‘peer’ can be broadly defined as any lender making loans in your area.”

A growing number of cases are involving the Equal Credit Opportunity Act. “The government will ‘slice and dice’ data in ways to make their case, Kider said. “If you can’t show that you haven’t made the effort to engage in Fair Lending, then they can make the case that you are deliberately not making the effort—and in turn, deliberately discriminating by discouraging consumers from participating in lending…it’s a shift from classic redlining, when you simply weren’t making loans in certain areas, to a case where you are accused of redlining by discouraging lending.”