Back in January, the National Credit Union Administration (NCUA) published their 2024 supervisory priorities, which outline the agency’s main focal points during examinations. While the priorities included several topics, this blog will focus on just one – fair lending (which was technically a sub-topic under the “consumer financial protection” heading). In particular, the priorities announced that NCUA examiners “will review policies and practices for redlining, marketing, and pricing discrimination risk factors.”
NCUA has always reviewed credit unions’ fair lending compliance, but that focus seems to have intensified in recent years. For example, NCUA board member Tonya Otsuka stated in January that redlining and lending discrimination will be an “area of focus” during her time on the board. Additionally, NCUA has increased the number of fair lending exams – which focus solely on fair lending issues and are separate from the typical NCUA exam – in recent years. In 2019, the agency set a goal of conducting 25 fair lending exams. In 2024, however, the agency is hoping to conduct at least 60 fair lending exams – which means the number of planned fair lending exams has more than doubled over the past five years. According to this frequently asked questions webpage, credit unions will be chosen for fair lending exams based on having “demonstrated the potential for a higher fair lending risk,” which NCUA will determine by looking at factor such as “HMDA data, fair lending violations, and general compliance risks.” This 2013 letter to credit unions provides more information on NCUA’s process for assigning fair lending exams.
Marketing
The letter notes that NCUA examiners will be examining credit unions for fair lending risk factors relating to marketing. You might be wondering how fair lending risk can arise during marketing. Well, section 1002.4 of Regulation B (which implements the Equal Credit Opportunity Act) prohibits a credit union from making “any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” According to the staff commentary, this means “[t]he use of words, symbols, models or other forms of communication in advertising that express, imply, or suggest a discriminatory preference or a policy…” However, the commentary also notes that a credit union is permitted to “affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit.” Credit unions may want to review their advertisements to determine if they might discourage particular groups from applying for credit.
Additionally, discouraging real estate-related loan applications on the basis of race, color, national origin, religion, sex, handicap or familial status could also be a violation of section 701.31 of the NCUA regulations. Section 701.31(d) also requires advertisements for real estate-related loans to include a notice that the credit union does not discriminate, which is typically satisfied by including the “Equal Housing Lender” logo in the advertisement.
Pricing Discrimination
As the name implies, pricing discrimination can arise if a credit union offers less favorable pricing – such as the interest rate, fees, and other charges – to an applicant based on a prohibited basis such as race, sex religion, national origin, etc. Credit unions may want to review their loan pricing policies and practices to determine if policies are being set based on a prohibited basis or whether the pricing could have a disparate impact – that is, a neutral policy or practice that tends to result in members sharing a particular characteristic (race, religion, sex, national origin, color, etc.) receiving less favorable pricing than their similarly-situated peers. Pricing risk can also arise in situations in which a credit union grants discretion to a third-party, such as an indirect auto lender, to adjust the rate or other pricing factors.
Credit unions are, of course, permitted to base the pricing on creditworthiness. In fact, federal regulations require a risk-based pricing notice in situations in which, based on information in a consumer report, an applicant receives terms that are materially less favorable than the terms provided to a substantial portion of consumers.
Redlining
The supervisory priorities letter specifically mentions redlining. Redlining is the practice of denying access to credit based on where a potential borrower lives, rather than on their creditworthiness, which has resulted in minority communities being deprived of credit access or receiving less favorable terms.
Redlining has been a major focus of the Biden Administration, with the Department of Justice (DOJ) launching its “combatting redlining initiative” in 2021. Through this initiative, federal regulators like NCUA are encouraged to refer potential redlining cases to the DOJ for potential enforcement actions. According to a recent DOJ press release, this initiative has resulted in 13 redlining resolutions since 2021 and over $137 million paid by financial institutions as relief for affected communities. The combatting redlining initiative encourages NCUA to refer potential redlining cases to the DOJ, and cases involving violations of the Fair Housing Act could be referred to the Department of Housing and Urban Development (HUD) as well.
Since the launch of the combatting redlining initiative, the DOJ has brought redlining cases based on statistical data rather than on overt evidence of discrimination. When deciding to bring a redlining case, the DOJ will look at the lending areas serviced by the institution and compare the institution’s statistical data to that of its peers. If an institution’s data shows that it is providing fewer loans, or receiving fewer applications, from certain demographic groups, then the DOJ could view that as evidence of redlining. Credit unions may want to review their loan originations and application data compared to their peers in the same area when determining if redlining risk exists. Additionally, a credit union may want to review the location of its branches and loan production offices to determine if there are any areas or neighborhoods that are currently being underserved by the credit union.
America’s Credit Unions will continue to monitor developments relating to Fair Lending and will update our members via future posts in the Compliance Blog.