Is the NCUA next?
Henry C. Meier, Esq. of The Law Office of Henry C. Meier, Esq.
On Friday afternoon, before the start of a holiday weekend, the FDIC announced that its regulators could no longer examine bank practices to determine if they have a disparate impact on minority loan applicants. This announcement could have a major impact on a wide range of lending practices.
The announcement came in the form of an amended version of the FDIC’s Consumer Compliance Examination Manual and announced: “Manual has been updated to reflect that the FDIC will evaluate potential discrimination under the Equal Credit Opportunity Act (ECOA) and Fair Housing Act only through evidence of disparate treatment,” and not disparate impact.
The ECOA and the Fair Housing Act (FHA) prohibit discrimination based on race, sex, age and other protected characteristics. It is a bedrock compliance principle in evaluating an institution’s lending practices; care must be taken not only to prohibit intentional discrimination (i.e., disparate treatment) but also to guard against policies and practices that have the effect of disproportionately harming a protected class.
The redacted manual contained the following example: A mortgage lender has a policy of only making mortgage loans for $60,000 or more. According to the redacted manual the policy disproportionately harms minority mortgage applicants. As a result, the lender would have to demonstrate the policy reflects a “business necessity,” which very generally means evidence that the policy is necessary to implement a nondiscriminatory requirement. The key distinction is that whereas disparate treatment is proven with the evidence of intent to discriminate, disparate impact has no corresponding mental state requirement and can often be proven with statistical evidence.
In April, the Trump Administration issued Executive Order (EO) 14281, “Restoring Equality of Opportunity and Meritocracy.” It ordered executive branch agencies, a designation the Trump Administration argues includes the NCUA, to work with the Attorney General to examine “all existing regulations, guidance, rules or orders that impose disparate-impact liability or similar requirements. It also details the agencies’ steps for their amendment or repeal, as appropriate under applicable law.” The EO mandated that they evaluate similar state-level laws and regulations. The FDIC is the second banking regulator to reevaluate its policies following the EO. In July, the Office of the Comptroller of the Currency (OCC) took similar steps regarding its fair lending manual.
The FDIC’s action is the latest in the legal battle that has been brewing for decades over the proper interpretation of the FHA and the ECOA. For example, in the 2005 case Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062, 1068 (S.D. Cal. 2008) African Americans sued a loan originator over its policy of granting brokers discretion when charging fees to loan applicants. The plaintiffs argued that the policy disproportionately impacted minority applicants because they were charged higher fees. The lender argued that neither the ECOA nor the FHA prohibited policies that disproportionately impacted minorities in the absence of proof that the disparity was intentional. The District Court refused to dismiss the lawsuit.
Although the acts taken by the FDIC, of course, have no direct impact on the NCUA, given the EO, it seems likely the NCUA will take a similar stance. From a risk management viewpoint, an examination framework that deemphasizes statistical disparities could impact everything from your credit union’s hiring practices to its lending policies.