Loans for All: Putting an End to Discriminatory Lending

In late 2017, Queer Money and Forbes both profiled an attempt by Phillip Endicott from Equality Washington to establish a credit union for the LGBTQ community. His statement from the interview offered a stark reality: “In 29 states, you can get married and be denied a home loan because of who you are, how you live and who you love.”

Thus, he launched an effort to establish Equality Credit Union. It was a concerted effort to meet the underserved needs of the LGBTQ community. And while they were set to open in June of this year, the effort has been delayed. Fundraising for the credit union is still ongoing.

The problem highlighted by Endicott in the LGBTQ community is an example of when discriminatory lending appears clear and obvious. However, the challenges of fair lending impact many people from all walks of life. Lending discrimination can happen inadvertently, such as when some members unintentionally receive better rates on loans than other members who are associated with a minority group. These instances are tricky. There may have been no intention to practice unfair lending or discrimination, but that does not clear you from regulator scrutiny.

Another example of discriminatory lending involves race and mortgage approval rates. According to Pew Research, mortgage market data shows there are “continuing challenges black and Hispanic homebuyers and would-be homebuyers face.” Statistical data gathered from the federal Home Mortgage Disclosure Act also showed that “in 2015, 27.4% of black applicants and 19.2% of Hispanic applicants were denied mortgages, compared to 11% of white and Asian applicants.”

The most-cited reason for lenders to deny a mortgage application for Caucasians, Hispanics and Asians was a too-high debt-to-income ratio; the top reason among blacks was cited as poor credit history. Pew Research also showed that in addition to facing difficulty in getting approved for a loan, blacks and Hispanics are hit with higher interest rates once they’re approved.

It is important for credit unions to ensure they treat all members fairly in regard to lending. With that in mind, take a look at these five fair lending pitfall areas. Failing to address these points will most certainly land you in hot water with a compliance examiner. Instead, be mindful so you can confidently stand behind your commitment to fair lending.

Five Fair Lending Pitfall Areas

1. Data Analysis

Statistical analysis yields great benefits in regard to your data. Regulators generally start with data analysis, as it is one of the easiest ways to uncover discrimination. The purpose of fair lending is to ensure that people from similar economic backgrounds are treated equally during the lending process. A quick analysis of your data can reveal possible indicators for discrimination. Remember, this does not mean discrimination is occurring, but it does give you a good place to start.

2. Current Fair Lending Policies

Are your documents and forms up to date? They should be, of course, but sometimes necessary updates and changes go unnoticed if they’re not taken care of properly. When this happens, it leaves the door wide open for trouble. You must keep forms, disclosures and lending documents on your radar to ensure your fair lending policies remain current. Otherwise, you’ll risk being penalized and/or upsetting members. It is important to choose a forms provider that offers both state and federal compliant documents and disclosures. Not all forms providers automatically update forms when new regulations are passed. Take precautions, and be sure to ask your forms provider if this is something they include in their services before making a switch.

3. Origin vs. Citizenship

This one can be tricky. It is important for the correct wording to be used. For instance, there is a difference between telling a member, “We are denying your automobile loan request because you are from country ‘A,’” versus telling that same member, “We are denying your request for a car loan because our concern is you are not a citizen and may remove the vehicle from the U.S. and take it to country ‘A.’” The first seems very discriminatory even though the intent is pure, and the statement still opens your credit union up to a fair lending lawsuit. The second addresses the same concern from a citizenship standpoint by framing the concern appropriately. This is where staff training is helpful. Make sure you have proper procedures in place for when a loan is denied so you can appropriately explain to the member why. Does your credit union staff know who they can loan to? What is required for lending to non-citizens? What disclosures are required for lending documents if they lend in different states?

4. Failure to Offer Compliance Training

Remember, this is one of the seven risk assessment factors compliance examiners will look for. All employees, management and your board should be trained annually. Be sure to document attendance, material comprehension and what to do when staff members fail to attend or pass the comprehension test. If your credit union uses second language lending documents such as Spanish documents, be sure to provide your staff with the necessary training for these documents as well. Has your credit union considered outsourcing compliance support? Is there a proper resource at your credit union for compliance questions?

5. Board and Senior Staff Support

It is important for senior staff and your board to understand the importance of fair lending as it relates to your credit union. Their role should be to maintain an effective fair management lending system and make sure proper resources (like an annual risk assessment) are in place to safeguard your credit union. Inform your credit union board of any compliance issues. Following regulations and providing employee training could improve growth numbers. When a member is denied for a loan, they may look elsewhere. Keep employees and members happy.

Fair Lending for All Is a Purposeful Move

Remember, fair lending is more than a just a sentiment. It takes purposeful effort. Maintenance is key, and having compliant forms and disclosures is also essential. That is where working with a trusted provider of compliant credit union forms can make an impact. By knowing that all forms, disclosures and documents are compliant, you’ll have one less pitfall to worry about in regard to fair lending. In addition, implementing training for how to use these documents is just as important as having up-to-date forms.

As more strides are made to establish better financial representation for all individuals in our society (as in the case of the proposed Equality CU), credit unions can be leaders in ensuring equal lending today. Stay true to the credit union mission of providing financial well-being to all members without discrimination. Collaboratively, credit unions have the power to make discriminatory lending a thing of the past and make our communities better for everyone.

Richard Gallagher is CEO for Oak Tree Business Systems, Inc. He can be reached at 800-537-9598 or clientservices@oaktreebiz.com.