How to Investigate a Fair

Lending Discrimination

Complaint

◦ Mortgage lending discrimination is defined by federal and state statues.

Title VIII, 42 U.S.C. § 3605; Equal Credit Opportunity Act (ECOA), 15 U.S.C. §§ 1691-

1691f The Civil Rights Acts of 1866 & 1870, 42 U.S.C. §§ 1981-

1982 (Sections 1981 & 1982) Sections 1985 & 1986, 42 U.S.C. §§ 1985 & 1986 Various state and local civil rights statutes

Lending Discrimination Statutes and Regulations

Fair Housing Act

Prohibits Discrimination in the Sale, Rental and Financing of Residential Real Estate

PROTECTED CLASSES OR PROHIBITED BASIS

RACE COLOR RELIGION NATIONAL ORIGIN SEX FAMILIAL STATUS HANDICAP (Disability)

DISCRIMINATORY HOUSING PRACTICES

Unlawful refusal to sell, rent or negotiate Unequal treatment in terms, conditions, or

privileges Failing to accept or consider a bona fide

offer Refusing to sell to or rent , or negotiate for

the sale or rental of a dwelling

DISCRIMINATORY HOUSING PRACTICES [con’t]

Discriminatory advertisements, statements, or notices

Indicate through advertising any preferences or limitations

Imposing different sale prices Misrepresentations on availability of

housing

DISCRIMINATORY HOUSING PRACTICES [con’t]

Using different qualifications, criteria and standards

Providing different information, or promotional activity

Evicting any tenant on a protected basis or the characteristics of a tenants guests

Discrimination in Terms and Conditions

Using different policies, practices or procedures in determining a person’s eligibility

Using policies practices and procedures in an arbitrary and discriminatory manner, to reject a persons application or preapplication

OTHER PROHIBITED PRACTICES

Steering Assigning a person to a particular lending channel on a prohibited basis

Discouraging inspections A packager may not refuse to package an

application

Other Practices of Making Housing Unavailable

Using codes or devices to segregate or reject persons

Refusing to show listings in certain areas Denying or delaying the processing of an

application

Discriminatory Representations on the Availability of Dwellings

It is unlawful to provide inaccurate or untrue information about the availability of dwellings for sale, rent or financing.

DISCRIMINATION IN REAL- ESTATE RELATED TRANSACITIONS

Discrimination in the making of loans, grants, or other financial assistance

Discrimination in the purchase and packaging of loans

Discrimination in the terms and servicing of loans

Unlawful practices when selling, brokering, or appraisal of property as loan security

Equal Credit Opportunity Act

Prohibits Discrimination in credit related transactions

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Scope

◦ Race;◦ Color;◦ Religion;◦ National Origin;◦ Sex;◦ Marital Status;

◦ Age;◦ Receipt of public

assistance income; and◦ Good faith exercise of

rights under the Consumer Credit Protection Act.

• ECOA prohibits discrimination in any aspect of any type of credit transaction on a prohibited basis, which includes:

12 C.F. R. 202.2(z)

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Taking the Application A creditor cannot do anything that would

discourage (on a prohibited basis) a reasonable person from making or pursuing an application.

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Evaluating the Application General Rule: The creditor cannot take a

prohibited basis into account when evaluating an application.

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Evaluating the Application General Rule: The creditor cannot take a

prohibited basis into account when evaluating an application. ◦ Credit History: To the extent that a creditor

considers credit history, the creditor must consider other information that the applicant presents that tends to indicate that the credit history being considered doesn’t accurately reflect the applicant’s creditworthiness.

◦ Immigration Status: A creditor can consider whether an applicant is a permanent resident of the U.S. and his immigration status.

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Notice of Action Taken A creditor must notify an applicant of action

taken on his application.◦ When approved, the notification of action taken

can be express or implied.◦ When declined, the notification must be in writing.

Complainant’s qualifications•Review complainant's loan or application

•Loan programs •Rate sheets•Underwriting guidelines

Comparative evidence•Review comparable files, generally identified through HMDA

•Testing evidence•Statistical evidence

•Marketing efforts

Interviews and other information gathering•Document any instances of direct evidence

•Confirm or refute reasons given by respondent lender for actions taken

•Anecdotal or other evidence of discrimination by lender

The Nuts and Bolts of a Lending Investigation

Where does it occur? ◦ Origination;◦ Servicing; and/or ◦ Collection of loans◦ Foreclosure Rescue Schemes

Discriminatory Lending

What is a Mortgage?

Simply: Mortgages are the loan that homeowners borrow from banks to purchase their homes

The homeowner pays a monthly amount that consists of both Principal and Interest.

The borrower pledges the underlying land as collateral for the loan If the borrower fails to make re-payment, the mortgage gives the lender the right

of foreclosure on the loan and therefore can seize the property This can be viewed as an investment by the banks in the mortgage market –

they are purchasing an asset that pays a monthly amount of Principal and Interest (P&I)

The banks often sell these assets to other investors to raise capital

Home Owner Lending Institution

MortgageFunds =

What are Mortgage Backed “Pass-Through” Securities?

A number of similar mortgages (underlying collateral, design, rates and maturities) are combined into a single group

Mortgage documents associated with this group are delivered to a custodian and are assigned an identification (pool) number

A Mortgage Backed Security (MBS) is issued with a face amount equal to the cumulative outstanding principal balance of the mortgages (original balance)

The mortgages that have been pooled together serve as the collateral for the security

Most MBS are guaranteed and/or issued by a U.S. Government Agency (FNMA, Freddie Mac or GNMA)

+ + = SecuritizedMortgage Pool

or Pass-throughs

Data Collection Guiding Principles

◦ Include any loan or borrower characteristic that comes into play during the lending process

◦ Collect relevant evidence that will affirm or refute that discriminatory practice occurred.

◦ Identify maximum number of characteristics that can explain lending disparities

Home Mortgage Disclosure Act Data

Comparable loan files

Testing evidence

Statistical evidence

Marketing efforts

Comparative Evidence

I. Application Documents

II. Borrower’s Qualifications

III. Property Valuation

IV. Lender's Working Papers (key records in

conducting a file review)

V. Adverse Action (if present, also a key record in a file review)

V. Notices

VI. Closing Document

s

Analyzing a Loan File

Lending Environment Assess Changes in Lending Environment

◦ Review policies and guidelines to check for any changes over the quarter

◦ Rate sheets◦ Exception policies◦ Organization of lending regions◦ Changes to pricing engines◦ Pricing specials

Document any instances of direct evidence

Anecdotal or other evidence of discrimination by lender

Affirm or refute reasons given by respondent lender for actions taken

Interviews and other information gathering

Complainant’s qualifications•Review complainant's loan or application

•Loan programs •Rate sheets•Underwriting guidelines

Comparative evidence•Review comparable files, generally identified through HMDA

•Testing evidence•Statistical evidence

•Marketing efforts

Interviews and other information gathering•Document any instances of direct evidence

•Confirm or refute reasons given by respondent lender for actions taken

•Anecdotal or other evidence of discrimination by lender

The Nuts and Bolts of a Lending Investigation

Thank You!