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Mortgage
Bankers and Brokers
Mortgage Banking Bulletin
August 26, 1998
To: The Institution Addressed
Re: Fair Lending Policies and Procedures
Section 296-a of New York State’s Executive Law prohibits discrimination in
consumer credit transactions. Accordingly, the activities of mortgage bankers operating in
New York fall within the purview of Section 296-a. The Banking Department’s
examinations of mortgage bankers now include enhanced procedures designed to test for
compliance with the fair lending statute. A finding of noncompliance can result in a fine,
return of fees and interest paid by affected consumers, suspension of operations, or
revocation of the mortgage banker license.
Discriminatory treatment can take many forms. The refusal to make credit available to
protected classes of consumers (i.e. minorities, women, the disabled, etc.) has not
generally been characteristic of the activities of mortgage bankers. For mortgage bankers,
a more likely source of fair lending violations, and one that will receive due attention
during the examination, arises out of the practice of taking overages.
An overage occurs when a lender encourages or permits a loan officer to impose a higher
number of points or a higher interest rate on a loan to certain borrowers than is imposed
for the same product offered to other borrowers. Overages are typically shared by the
lender and the loan officer as a means of increasing compensation. Lenders have indicated
that the ability to charge overages affords them the opportunity to provide an incentive
to its loan officers.
Be advised that the Banking Department will review lender policies during examinations,
to determine whether overages are taken and, more importantly, to assess whether such
practices have resulted in lending discrimination.
The practice of imposing overages is not illegal under Section 296-a of the New York
State Executive Law, the Equal Credit Opportunity Act ("ECOA") or the Fair
Housing Act ("FHA"). However, as the following examples demonstrate, the
practice may, in certain circumstances, result in illegal discrimination.
- Whenever a loan officer is given discretion in setting the price of a loan, as well as
when to impose an overage, there is a chance that disparate treatment on a prohibited
basis might occur. Therefore, a lender that permits overages in its mortgage loans should
review its lending performance to ensure that the overage policy is applied fairly and
without regard to race, gender, or any other prohibited factor under Section 296-a, ECOA
and the FHA.
- A lender whose policy permits overages in mortgage loans of a certain amount, for
example, should evaluate whether the policy has a disparate impact on applicants on a
prohibited basis. For example, a lender who permits overages only in loans of under
$100,000 may review its lending performance and find that, despite treating all applicants
for such loans evenhandedly, a disproportionate number of borrowers who receive loans
under the threshold and who pay overages are minorities. This lender will have to provide
a defense, based on business necessity, against the claim that the neutral application of
its policy has adversely affected a group on the prohibited basis of race in violation of
Section 296-a, ECOA or FHA. Also, even if the lender offers a valid business necessity
defense, its practice still would be impermissible if the business objective could be
achieved by other means with a less discriminatory impact.
- A lender whose policy permits overages in mortgage loans originated in certain
geographies must be able to demonstrate whether legitimate market conditions differ among
the relevant geographies. For example, a lender who imposes overages in urban counties but
does not do so in contiguous suburban counties will need to demonstrate that legitimate
market factors exist that support the policy of treating the geographies differently.
To the extent that you permit originators and brokers to impose overages, the Banking
Department will also review your ability to effectively monitor your program as well as
your ability to effectively train your staff.
In designing and implementing policies and procedures to ensure compliance with the
fair lending statute, it may be appropriate to assess whether employees with a financial
stake in overages are constrained by effective disincentives from engaging in
discriminatory pricing or practices. Below is a list of suggested elements you may want to
include in your fair lending program:
- Customer Contact. Are adequate policies, procedures, employee training and
management oversight in place to ensure applicants will receive consistent treatment in
conformance with fair lending principles? For example, have you considered conducting
customer satisfaction surveys to monitor performance of your employees who have had
contact with the applicant?
- Pricing. Do your policies, procedures, employee training and management oversight
ensure equitable treatment of all applicants in negotiating the interest rate and any
points? For example, do you use standard pricing sheets throughout your organization? Are
they sufficiently comprehensive to provide pricing guidance in nearly all situations, and
are copies routinely retained for future reference? Do you monitor compliance with these
instructions? Are pricing exceptions, and the reasons therefor, adequately documented and
approved at appropriate levels?
- Underwriting. Do your policies, procedures, employee training and management
oversight ensure that your credit officers do not discriminate against protected classes
in underwriting decisions. For example, do your underwriting policies consider applicants
with non-traditional credit histories? Do you offer any help to applicants who do not meet
your minimum underwriting guidelines?
- Second Review. Are all denied applications routinely reviewed by a senior lending
officer to determine if underwriting guidelines were followed? Is an attempt made to
explore alternatives, such as other forms of credit, other acceptable means of documenting
employment history or income sources, or other lending programs for which the applicant
may qualify.
- Collection and Foreclosure. Are your collection and foreclosure policies and
procedures, employee training and management oversight sufficient to ensure equitable
treatment of all debtors?
- Third Party Originations. If you are using brokers to originate applications, do
you require that they demonstrate knowledge of and compliance with fair lending principles
and commit in writing to observe these practices? Are copies of relevant fair lending
policies and procedures given to the brokers?
- Complaint Resolution. Do you have policies, procedures, employee training and
management oversight to ensure that fair lending complaints are identified and forwarded
to a designated individual for appropriate attention?
- Training. Do you periodically review your organization’s employee training
needs to ensure initial and follow up training is given on a timely basis. Are course
outlines kept up to date with changes in the law, regulation and judicial interpretations?
- Marketing. Have you reviewed your marketing strategy to determine whether it
targets protected classes in ways inconsistent with fair lending principles? For example,
are more expensive credit products promoted to certain groups and not others?
- Compliance Monitoring. Is your organization devoting sufficient management
resources to ensuring compliance with your fair lending policy? Does the individual
assigned to monitor compliance have sufficient experience, training, authority,
independence and staff to carry out his or her assignment? Does your monitoring program
review lending by loan officer and branch office as well as on company-wide and state-wide
bases?
The content and enforcement of fair lending statutes and regulation continue to evolve
as a result of judicial precedents, new legislation and regulation and actions by various
regulatory bodies. If you should have questions about fair lending issues not encompassed
by the above, we would welcome the opportunity to meet with you to discuss your concerns.
Very truly yours,
Richard L Ehli
Deputy Superintendent of Banks
Mortgage Banking Division |
