Compliance Essentials: Overview of Fair Lending and Equal Opportunity Compliance

May 7, 2017

Moderator and Panelist: Michaela Albon, Fair and Responsible Practices Officer, EVERBANK Panelists: Olivia Kelman, Associate, K&L GATES LLP Joseph T. Lynyak III, Partner, DORSEY & WHITNEY LLP Melanie Brody, Partner, MAYER BROWN LLP Where do I find the presentation? On the app schedule…. 1. Under session, click 2. Choose Presentation 3. Scroll through slides Resources Or on the website… visit mba.org CLE Credits

This session is intended to satisfy CLE credits upon approval by applicable state bar licensing entities. Please give your BAR number to the staff at the MBA CLE desk at Registration by Tuesday. Compliance Essentials: Overview of Fair Lending and Equal Opportunity Compliance May 7, 2017

Olivia Kelman K&L Gates LLP 200 S. Biscayne Blvd., Suite 3900 Miami, FL 33131 [email protected] 305-798-8566 Fair Housing Act Fair Housing Act Background – Antidiscrimination Provisions

Fair Housing Act prohibits taking many actions “because of race, color, religion, sex, familial status, or national origin,” including: • “To refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling” • “To discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith” • “To represent to any person … that any dwelling is not available for inspection, sale, or rental when such dwelling is in fact so available” • “To discriminate against any person in making available [a “residential real estate-related”] transaction, or in the terms or conditions of such a transaction” • A “residential real estate-related” transaction includes making and purchasing loans secured by residential real estate, insuring such loans or such real estate, and selling, brokering, or appraising such real estate”

42 U.S.C. §§ 3604-3605 Fair Housing Act Background – Proving Violations

Fair Housing Act violations may be proved under one of three theories:

• Overt Discrimination (intentional discrimination)

• Disparate Treatment (intentional discrimination) • Classic Example: Steering – Bellwood v. Dwivedi, 895 F.2d 1521, 1528 (7th Cir. 1990) (Posner, J.) – “[t]he mental element required in a steering case is the same as that required . . . on a theory of disparate treatment [which] means treating a person differently because of his race” (emphasis added)

• Disparate Impact (unintentional discrimination) Fair Housing Act Background – Administration and Enforcement

• HUD (42 U.S.C. § 3612) • HUD has “authority and responsibility” for enforcing and administering the Act—including rulemaking authority.

• Attorney General (42 U.S.C. § 3614) • Pattern or practice cases • Referrals by HUD

• “Substantially Equivalent” state and local agencies (42 U.S.C. § 3610)

• Private persons (42 U.S.C. § 3613) • Administrative complaints with HUD • Civil actions – Two-year statute of limitations to file a lawsuit Fair Housing Act Background – Remedies

• HUD • Authority to obtain relief through conciliation (42 U.S.C. § 3610(b)) • Authority of administrative law judge to recommend—and the Secretary to approve—awards of actual damages to aggrieved persons, injunctive relief, and civil penalties (42 U.S.C. § 3612(g)(3), (h))

• Attorney General (42 U.S.C. § 3614(d)) • Monetary damages to persons aggrieved, injunctive relief, and civil penalties

• Private persons (42 U.S.C. § 3613(c)) • Monetary damages, punitive damages, injunctive relief, and attorneys’ fees and costs Fair Lending – Areas of Risk

• Underwriting

• Pricing

• Product placement (“steering”) • “Mystery shopping” or “tester” cases

• Marketing / Advertising • Location • Content - accessibility (language, disability)

• Servicing

• Redlining Redlining – Background

• Denying financial services—usually residential mortgage loans—to residents of certain geographic areas because of the racial or ethnic makeups of those areas: • “[D]eclaring black areas off-limits for mortgage lending [is] a practice otherwise known as redlining.” – Press Release, U.S. Department of Justice, “Justice Department Obtains Unprecedented Settlement from D.C. Area Bank [i.e., Chevy Chase] for Allegedly Failing to Service Predominantly Black Areas,” (Aug. 22, 1994).

• Historically, red lines were allegedly drawn on maps to indicate neighborhoods in which companies would refuse to do business.

• Currently, regulators apply the term “redlining” much more broadly: • Redlining is “a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located.” – FFIEC Interagency Fair Lending Examination Procedures Manual (Aug. 2009) Redlining – Background

• To date, redlining enforcement has focused exclusively on depository institutions due to their Community Reinvestment Act obligations. • “A bank shall delineate one or more assessment areas within which the Board evaluates the bank’s record of helping to meet the credit needs of its community.” Regulation BB, 12 C.F. R. 228.41(c) • Have the institution’s assessment area boundaries been fairly drawn in a nondiscriminatory manner? • Has the lender properly served minority communities in the assessment area?

• CFPB now conducts redlining examinations and investigations of non-depository institutions and has indicated that it expects such institutions to minority their lending for potential risk. • “Mortgage lending continues to be a key priority … . We have focused in particular on redlining risk, evaluating whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.” • Going forward, because of emerging fair lending risks in other areas, we are increasing our focus on redlining, mortgage and student loan servicing, and small business lending.” – Fair Lending Report of the Consumer Financial Protection Bureau, April 2017 Redlining – Recent Enforcement Actions

• DOJ v. Union Savings Bank and Guardian Savings Bank, S.D. Ohio (December 28, 2016)

• DOJ v. KleinBank, D. Minn. (January 13, 2017)

• DOJ and CFPB v. BancorpSouth Bank, N.D. Miss. (June 29, 2016) Claims Derived from HMDA Data

• Municipalities lawsuits

• Cities and other local government entities across the nation filed Fair Housing Act lawsuits against four of the nation’s largest banks alleging that “discriminatory” subprime loans caused minority borrowers to default on their loans and foreclose, which caused property values to decrease, which caused the cities to increase expenditures on municipal services and to lose tax revenues. – Miami, Miami Gardens, Los Angeles, Cook County, DeKalb County, Oakland, People ex. California, Los Angeles Unified School District

• Complaints allege public HMDA data provides factual support for claims

• U.S. Supreme Court’s May 1, 2017 decision in City of Miami v. Bank of America Corp., et al., 15-1111 Compliance Essentials: Overview of Fair Lending and Equal Opportunity Compliance May 7, 2017

Presented by: Joseph T. Lynyak III Partner Dorsey & Whitney LLP ECOA ECOA—The Procedural Anti-Discrimination Statute

The Equal Credit Opportunity Act • 15 U.S.C § 1691-1691f • Implemented by the CFPB’s Regulation B • 12 C.F.R. § 1002.1 et seq. • CFPB’s Official Interpretations • Applies to all credit transactions— • Not just housing • Not just consumer purpose credit (i.e., includes business credit) Applies to an “applicant” for credit—meaning that it applies to any person who applies to a creditor for— • An extension, renewal or continuation of credit, or • Applies indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit

Note: Dodd-Frank Expanded the Scope of Coverage—Awaiting the CFPB to Issue Implementing Regulations The ECOA—What is Prohibited

It is unlawful to discriminate against any “applicant” with respect to any aspect of a credit transaction on the basis of: • Race • Color • Religion • National origin • Sex • Marital status, or • Age Note that the protected classes of individual line up substantially identically with the FHA To “discriminate against an applicant” means to treat an applicant less favorably than other applicants • Section 1002.2(n) of Regulation B • The broad nature of the definition makes for very creative arguments…… The ECOA—What is Procedural

The ECOA and Regulation B establish parameters about the process by which a credit application is underwritten by a creditor • Establishes time frames for making credit determinations • Requires providing disclosures should an adverse credit decision be made • Prohibits asking for spousal co-signers—with limited exceptions Procedural issues can be segmented to several phases— • The application phase • The underwriting phase • The decision phase ECOA—the Application

General rule—A creditor can ask for just about anything—provided that the data requested does not discriminate against the applicant—includes a prohibition on discouraging applications • Disparate impact (discussed later) effectively limits data requests to data relevant to making a credit decision Special data collection rule for dwelling credit (i.e., home loans)—a creditor must request monitoring information— overlaps with HMDA’s data collection requirements • Ethnicity • Hispanic or Latino • Non-Hispanic • Race • American Indian or Alaska Native • Asian • Black or African American • Native Hawaiian or Other Pacific Islander, or • White • Age An applicant can refuse to answer—but the creditor must make visual observations • A telephone rule applies ECOA—Underwriting

A creditor may use any information to evaluate credit—but…. Regulation B imposes limits on specific categories of data— • Age • Childbearing or childrearing • Telephone listing • Certain income categories • Alimony and child support are special mention • Credit history • Immigration status • Marital status (including name) • Race, color, religion, national origin, sex ECOA—Decision

Timing rules for notifying an applicant— • 30 days after receiving a completed application, making a counteroffer or making an adverse action decision • 30 days after taking adverse action on an incomplete application • 30 days after taking adverse action on an existing account • 90 days after making a counteroffer if the applicant has not expressly accepted or used the credit Several alternative notification rules may apply ECOA—Decision

If a creditor provides an adverse action notice, the notice must provide the following:

The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant's income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The Federal agency that administers compliance with this law concerning this creditor is [name and address as specified by the appropriate agency or agencies listed in appendix A of this part].

Multiple applicant rule—if more than one applicant applies for credit—only one applicant need be notified Multiple creditor rule—if there are multiple creditors and one approves the credit and it is used by the applicant—no additional disclosure is required Third party rule—if no credit is approved—each creditor must provide an adverse action notice—but the third party may provide a combined notice for each creditor ECOA—Enforcement and Record Keeping

Violations can be brought within a 5-year period • Expanded from 2 years to 5 years by the Dodd-Frank Act Persons and entities authorized to bring enforcement actions include— • Individuals qualifying as applicants (includes non-profits and similar entities) • The federal banking agencies • The CFPB • The FTC • The Department of Justice • Other federal agencies • State attorneys general Proving Violations of ECOA and the FHA

Causes of action and elements of proof Accusations have frequently counted more than actual proof • Reputational risk is a paramount concern to mortgage lenders The technical legal requirements are at best uncertain • There are virtually no reliable judicial decisions in the fair lending area • Most “precedent” is based upon settlement by creditors with the DOJ, other federal agencies and private parties • The Obama Administration was very focused on race and gender discrimination claims – Creative theories abounded – The CFPB was at the forefront when examining for discrimination in lending • Whether the Trump Administration will adopt the same aggressive enforcement posture is unknown The availability of data elements is the single most critical element when proving discrimination Three Classes of Discriminatory Behavior

Intentional discrimination Disparate treatment Disparate impact • Evidentiary rules arose from employment discrimination cases • Griggs v. Duke Power Company, 401 US (1971) • Wards Cove Packing Company v. Atonio, 490 U.S. 642 (1989) Disparate Treatment

Disparate treatment alleges the linkage between the discrimination and a prohibited basis in a manner that the creditor’s decision-making process resulted in the individual being treated differently because of the identified prohibited basis • Direct evidence • Circumstantial evidence • Membership in a protected class • An application for credit for which the borrower was qualified • Rejection despite qualification • Creditor continued to approve credit for similarly situated applicants/borrowers • Matched pair analysis • Mystery shopping • A modified test is necessary to prove reverse redlining Disparate Impact

In a disparate impact case, the borrower has not been treated differently utilizing a prohibited basis, but the effect of the creditor’s practices is to adversely impact a protected class Traditional disparate Impact has been proven by a statistical comparison of the acceptance/rejection results of a protected group with the accepted/rejected results of all applicants in the loan pool • Courts have often employed the “BUT FOR” Test— • But for the status of the applicant/borrower as a member of a protected class, the applicant/borrower would have received financing – Or funding at a cost on more favorable terms • Lenders argued strongly in the last few years that disparate impact was not available to prove a fair lending claim based upon some ambiguity in the ECOA and the FHA • This legal position was soundly rejected by the Supreme Court in 2016 in the case of Texas Department of Community Affairs et al. v. Inclusive Communities Project, Inc. • The Court held that disparate impact is available to provide a fair lending violation • Importantly—the Court identified a burden-shifting test that has benefited mortgage lenders Disparate Impact—the Burden Shifting Test

The prima facie case • The plaintiff must identify a challenged practice or policy • The plaintiff must demonstrate the adverse impact of the practice on a protected group • The plaintiff must also prove causation between the questioned practice and the demonstrated negative impact on the protected class • Mere statistics reflecting disparities in applicants and rejection rates are not sufficient

– This is a big deal….one of the unanswered questions is whether the federal government will attempt to ignore the causation element Disparate Impact—the Burden Shifting Test—the Defendant

. Following a showing of a prima facie case, the defendant must show a legitimate business reason for the challenged practice A legitimate business reason is generally viewed as “proof that the challenged practice is reasonably necessary to achieve an important business objective.”

31 Disparate Impact—The Burden Then Shifts Back to the Plaintiff

. If the defendant is successful in demonstrating a legitimate business necessity, the burden shifts back to the plaintiff to show that a less discriminatory practice would serve the lender’s legitimate business concerns

32 Joseph T. Lynyak III – Dorsey & Whitney LLP Joe Lynyak is a financial services partner in Dorsey & Whitney’s Financial Services Practice. Focusing his practice on the regulation and operation of financial service intermediaries, he provides counsel on strategic planning, application and licensing, legislative strategy, commercial and consumer lending, examination, supervision and enforcement and general corporate matters. He has extensive expertise across a comprehensive range of issues before federal and state regulatory agencies such as the Federal Reserve Board, OCC, FDIC, CFPB, SEC, FTC and California and New York Banking Departments. Mr. Lynyak’s representative clients include foreign and domestic banks, savings associations, holding companies and mortgage banking companies. He can be contacted via email at [email protected] or at 310.386.5554.

33 Compliance Essentials: Overview of Fair Lending and Equal Opportunity Compliance May 7, 2017

Melanie Brody Partner MAYER BROWN LLP 1999 K Street NW, Washington, DC 20006 [email protected] | 202-263-3304 HMDA HMDA Background

• HMDA was enacted by Congress in 1975, and implemented via Regulation C by Federal Reserve Board rulemaking in 1976. • Since then, both HMDA and Regulation C have been amended several times. • HMDA’s key purpose is to require collection and reporting of data about mortgage loan applications to enable government agencies and other interested parties to:

• Determine whether financial institutions are serving the housing needs of their communities;

• Allocate housing and community development investments; and

• Identify possible discriminatory lending patterns and enforcement of antidiscrimination laws.

36 HMDA Background

• Dodd-Frank Act amended HMDA in 2010 to add new reporting requirements and authorize the CFPB to require reporting of additional fields. • Dodd-Frank Act also transferred HMDA rulemaking and other authority from FRB to the CFPB, effective July 2011. • The CFPB proposed major amendments to Regulation C on July 24, 2014. • The CFPB finalized these amendments on October 15, 2015. • The CFPB proposed further amendments that would clarify, make technical corrections, and make minor changes to Regulation C on April 13, 2017.

37 2015 Regulation C Amendments - Key Highlights

• Institutional Coverage

• Effective January 1, 2018, in addition to other coverage criteria, an institution will be subject to HMDA if it originated at least 25 covered closed-end mortgages in each of the two preceding years or at least 100 covered open-end lines of credit in each of the two preceding calendar years. • Transactional Coverage

• Effective January 1, 2018, covered loans generally will include closed-end mortgages and open- end lines of credit that are secured by a dwelling.

Business-purpose dwelling-secured loans and lines of credit will be covered only if they are home purchase loans, home improvement loans or refinancings.

38 2015 Regulation C Amendments - Key Highlights

• Collection and Reporting of Applicant or Borrower Information:

• For data collected on or after January 1, 2018, among other things, institutions must:

report whether or not they collected race, ethnicity, and sex on the basis of visual observation or surname; and

permit applicants to self-identify their race and ethnicity using disaggregated subcategories. • Quarterly Reporting:

• Beginning in 2020, covered institutions that reported a combined total of at least 60,000 applications and covered loans in the preceding calendar year must report quarterly.

39 HMDA / Regulation C Data Points (slide provided by CFPB)

• • • • • • • • • • • • • • • • • • • • • • •

• • • • • • • • • • •

• • • • • • • • • • • • • •

40 HMDA Data Accuracy

• The CFPB has made HMDA data accuracy a significant priority:

• CFPB Bulletin 2013-11:

• Ensuring HMDA data accuracy “is vital to carrying out the statute’s purpose” and an “important element” of the CFPB’s consumer protection mission.

• CFPB-supervised mortgage lenders need HMDA compliance management systems to ensure data accuracy.

41 HMDA Data Accuracy

• CFPB’s HMDA Resubmission Schedule and Guidelines:

• Institutions reporting fewer than 100,000 LAR entries should correct and resubmit HMDA data when 10 percent or more of a sample of HMDA LAR entries contains errors.

In some cases, sample error rates below 10 percent – or five percent in an individual data field – may require resubmission.

• Institutions reporting 100,000 or more HMDA LAR entries should correct and resubmit HMDA data when four percent or more of a sample of LAR entries contains errors.

In some cases, sample error rates below four percent – or two percent in an individual data field – may require resubmission.

42 HMDA Data Accuracy

• January 7, 2016 Request for Information:

• CFPB requested public comment on its resubmission guidelines, including the use of resubmission error thresholds, how they should be calculated, whether they should vary by size of submission or kind of data, etc.

• Comment period ended on March 14, 2016, and the CFPB is considering whether, and if so, how, to adjust the existing resubmission guidelines

43 HMDA Data Accuracy

• Enforcement:

• The CFPB has brought three public HMDA enforcement actions.

• Enforcement actions have arisen from CFPB HMDA data accuracy reviews.

• Remedies include civil money penalties, LAR resubmissions, and compliance management system enhancements.

44 Proposed Amendments to Regulation B

• Regulation C amendments effective January 1, 2018 require covered institutions to permit mortgage applicants to self-identify their ethnicity and race using certain disaggregated ethnic and racial subcategories. • March 24, 2017: CFPB Proposed amendments to Regulation B to facilitate compliance with Regulation C. and the collection and retention of mortgage applicants’ ethnicity, sex and race information.

45 Proposed Amendments to Regulation B

• Highlights of the proposed amendments include:

• A creditor would be authorized to collect applicant demographic information on “excluded transactions” without violating Regulation B:

• if it voluntarily reports the data under HMDA;

• for up to five years after it fell below the Regulation C loan volume threshold; or

• it exceeded the loan volume threshold in the first year of Regulation C’s two-year threshold period.

46 Proposed Amendments to Regulation B

• Highlights of the proposed amendments include:

• “Regulation B-only” creditors may, but are not required, to use disaggregated race and ethnicity information.

• If race and ethnicity information is collected on the basis of visual observation or surname, the creditor may only use the aggregated categories.

• Regulation B data collection model form will cross-reference data collection model form in revised Regulation C.

47 Proposed Amendments to Regulation B

• Highlights of the proposed amendments include:

• Model Application Forms

• Comments on the proposed amendments are due by May 4, 2017.

• Proposed amendments generally would be effective on January 1, 2018, to align with the effective date of amended Regulation C.

48 Melanie Brody Partner MAYER BROWN LLP Melanie Brody is a partner in Mayer Brown’s Washington DC office and a member of the Consumer Financial Services group and the Financial Services Regulatory & Enforcement practice. She concentrates her practice on consumer finance enforcement, supervisory and compliance matters, primarily for banks, mortgage lenders, auto lenders, credit card issuers, student lenders and other financial service providers. She represents clients in investigations, examinations and enforcement actions by the US Department of Justice, Consumer Financial Protection Bureau, Office of the Comptroller of the Currency, Federal Reserve Board, Department of Housing and Urban Development, Federal Trade Commission, state banking regulators and state attorneys general. She also develops compliance programs, and performs compliance and regulatory due diligence reviews. Melanie is a frequent speaker at conferences on various consumer finance issues, including fair lending enforcement, litigation and compliance, and compliance with federal and state consumer finance requirements. She also has published articles on a wide range of mortgage banking and consumer finance topics. Melanie is ranked among the top national lawyers in Consumer Finance by Chambers USA. [email protected] 202-263-3867

49 Compliance Essentials: Overview of Fair Lending and Equal Opportunity Compliance

May 7. 2017

Presented by Michaela Albon Fair and Responsible Practices Officer EverBank Key Components of a Fair and Responsible Practices Program Key Components of a Fair and Responsible Practices Program

• Coverage • Fair Lending – ECOA, FHA and applicable State Laws • Unfair and Deceptive Acts and Practices/Unfair and Abusive Acts and Practices • Residential, Consumer and Commercial Lending • Fair Banking • Program Oversight • Board of Directors and Executive Management • Committee Oversight • Business Accountability • Legal and Compliance • Quality Control and Audit • Training • Policies and Procedures, Marketing Materials, Compensation Plans, Scripts, Disclosures and Other Customer Facing Documents/Web Sites • Key Committee Membership – New Products; Credit Committees Key Components of a Fair and Responsible Practices Program

• Risk Assessments • Third Party Oversight • Brokers • Correspondents • Vendors • Testing • Quality Control and Internal Audit • Fair Lending Statistical Analyses • Disparate Treatment in Underwriting • Disparate Treatment in Pricing • Disparate Treatment in Granting Pricing Exceptions and Fee Waivers • Disparate Treatment in Servicing • Focus • Use of Proxies? Key Components of a Fair and Responsible Practices Program

• Disparate Impact Testing • Redlining and Steering • Complaint Management • Remediation and Other Corrective Action • Reporting on Results and Activities