MBAs Regulatory Compliance Conference 2011

Workshop 1: Quick Guide to the Alphabet Soup Federal Laws

Equal Credit Opportunity Act / Regulation B Fair Housing Act
Kris D. Kully
K&L Gates LLP 202.778.9301 kris.kully@klgates.com

ECOA and FHA

Fair Lending: Compliance is critical
1. Fair lending has always been a major compliance priority for most institutions Financial exposure Reputational issue Cases rarely involve overt discrimination Technical analyses fair lending claims 2. Obama Administration means business DOJ Fair Lending Unit Banking Agencies HUD FTC CFPB

Equal Credit Opportunity Act and Regulation B

15 U.S.C. 1691 et seq. 12 C.F.R. Part 202

Equal Credit Opportunity Act (ECOA) and Regulation B

Purpose of ECOA and Regulation B:
To promote the availability of credit to all creditworthy applicants with fairness & impartiality, and without discrimination based on: race color religion national origin sex marital status age (provided the applicant has the ability to contract) receipt of public assistance exercise of rights under the Consumer Credit Protection Act

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Coverage:
ECOA and Reg B apply to all persons who are creditors. A creditor is: a person who regularly participates in a credit decision, including setting the terms of credit Includes a creditors assignee, transferee or subrogree who so participates For purposes of the antidiscrimination provisions, includes a person who refers applicants or prospective applicants to creditors Applies to all types of credit, including loans to individuals or to organizations, for consumer or commercial purposes.

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Key Provisions:
Prohibits a creditor from discriminating against an applicant on a prohibited basis regarding any aspect of a credit transaction Requires creditors to notify applicants of action taken on applications Requires creditors to report credit history in the name of both spouses on an account Requires creditors to collect race/ethnicity and other information for certain dwelling-related loans Requires creditors to provide applicants with copies of appraisal reports Restricts when a creditor may require signature of a spouse on a credit instrument

Record retention requirements

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Prohibits discrimination on a prohibited basis:
A creditor may not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction
Includes underwriting, terms of credit, and servicing

A creditor may not discourage applicants or prospective applicants from making or pursuing an application
Includes advertising, marketing, any oral/written statement

Creditors must follow rules regarding requests for information and evaluation of applications

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Notice Requirement ( 202.9):
A creditor must notify an applicant of the action taken within:
30 days after receiving a completed application, a notice of action taken on the application (approval, counteroffer, or adverse action) 30 days of taking adverse action on an incomplete application (unless it provides a notice of incompleteness) 90 days after notifying the applicant of a counteroffer and the applicant does not accept

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Reporting credit history:
ECOA does not require reporting credit information to consumer reporting agencies (CRAs) If creditor does report, ECOA requires reporting info on both spouses:
it must designate any new account to reflect the participation of both spouses, if the applicants spouse is permitted to use or is contractually liable on the account
it must furnish information to consumer reporting agencies in a way that will allow the CRA to access the information in the name of each spouse it must respond to inquiries about an account in which both spouses participate in the name of the spouse about whom the information is requested

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Collection of Race/Ethnicity Information (202.13):
Creditors receiving an application for a purchase money loan or refinance involving an owner occupied dwelling must request information about the applicants ethnicity, race, sex, marital status and age. If applicant chooses not to provide, must note on application; creditor must then note based on visual observation/surname. Model application forms (URLA)
HMDA HAMP

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Providing Appraisal Reports:
A creditor must provide applicant copy (at no additional cost) of written appraisals and valuations (AVMs, BPOs) developed in connection with application for a loan be secured by a first lien on a dwelling, promptly but at least within 3 days prior to closing. Regardless of whether credit granted or denied, application incomplete or withdrawn. Must notify at application in writing of right to receive copy (Current regs based on prior statute: Must provide appraisal report, either routinely or upon the applicants request, regardless of lien position.)

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Spousal Signature ( 202.7(d)):
A creditor may not require signature of an applicants spouse or other person (other than a joint applicant) on a credit instrument Certain exceptions sometimes apply, but careful legal and factual review is important Unsecured credit applicant relying on joint property Unsecured credit community property states Secured credit Co-signors to support creditworthiness

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Women- or Minority-Owned, and Small Businesses
Must inquire whether business is women-owned, minority-owned, or small business Must maintain records and submit to CFPB Must if feasible shield information from underwriters Prohibition against discrimination based on this information CFPB to issue regulations

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Record Retention ( 202.12):
Must retain applications and information required to be obtained or used in evaluating the application Notice of action taken, adverse action/statement of specific reasons Any written allegations of violations
For 25 months after application (for consumer credit)

Equal Credit Opportunity Act (ECOA) and Regulation B (contd)

Enforcement:
Regs by FRB, now CFPB Administrative enforcement by federal agencies (OCC, FRB, FDIC, NCUA, CFPB, FTC, DOJ, HUD)

Remedies:
Actual damages Punitive damages up to $10K in individual actions and lesser of $500K or 1% of net worth in class actions Equitable and declaratory relief Costs and attorneys fees

Fair Housing Act

42 U.S.C. 3601, et seq.

Fair Housing Act

Purpose:
Prohibits discrimination in all aspects of residential real estate related transactions, including the sale or rental of housing, as well as the making/purchasing/servicing mortgage loans Prohibited factors:

Race
Color Religion National origin Sex Handicap Familial status

Fair Housing Act (contd)

Coverage
Any person or other entity whose business includes engaging in residential real estate-related transactions
includes making or purchasing loans or providing other financial assistance for purchasing, constructing, improving, repairing or maintaining a dwelling, or secured by residential real property includes servicing activities, including modifications and other default remedies includes real estate brokering and appraisal activities, advertising the availability of real estate, provision of reasonable accommodations to persons with disabilities

Fair Housing Act (contd)

Key Provisions
Prohibits discrimination in housing-related lending activities against any person on a prohibited basis. Prohibits redlining (i.e., denying loans in certain neighborhoods even though the individual applicant may be eligible for credit), expressing a racially exclusive image, discouraging applications from protected class members, and imposing more onerous terms and conditions on protected class members.

Fair Housing Act (contd)

Enforcement
HUD DOJ

Remedies
Actual damages
Injunctive or other equitable relief Civil penalty (in administrative proceeding or civil action by Attorney General)

Punitive damages (in civil action by private persons)

Attorneys fees and costs

 Major Issues Include:

Underwriting / Denials Pricing Steering Redlining Reverse Redlining / Predatory Lending Servicing / Loan Modifications