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Side by Side: A Guide to Fair Lending

PART FOUR: ENFORCEMENT ACTIONS AND REMEDIAL MEASURES
Excerpts from the Interagency Policy Statement on Discrimination in Lending
CONCLUSION
Final Word

PART FOUR: ENFORCEMENT ACTIONS AND REMEDIAL MEASURES

In order for financial institutions and their legal counsel to evaluate any self-assessment program adequately, it is important to know how the regulatory agencies will respond to illegal discrimination.

If a pattern or practice violation is identified through an institution's own self-assessment effort, and a federal regulatory agency becomes aware of it, the agency is required under the Equal Credit Opportunity Act to refer the matter to the Department of Justice whether or not corrective actions have been taken. As noted in Part One, in order to address lenders' concerns about possible referrals and to encourage self-assessments, several agencies including the FDIC and the Department of Justice, have agreed to seek self-testing results only when a lender uses self-testing to defend itself against a charge of discriminatory activity brought by the agency through an independent determination. While this policy has not been expanded by most agencies to apply to other methods of self-assessment, self-discovery and correction of possibly discriminatory practices before an applicant is harmed or a federal regulatory agency learns of them can only benefit an institution. Voluntary identification and correction of violations disclosed through a self-testing program will be a substantial mitigating factor in evaluating what actions should be taken.

It is also important to consider what criteria will be employed by the federal banking regulatory agencies in taking enforcement actions or seeking remedial measures when discrimination is discovered. These criteria are outlined below in an excerpt from the Policy Statement on Discrimination in Lending issued by the Interagency Task Force on Fair Lending.

Policy Statement on Discrimination in Lending

Issued by:

Interagency Task Force on Fair Lending

Provided to FDIC supervised institutions as FIL 29-94, dated April 29, 1994.

Published in the Federal Register 59 FR 18266, dated April 15, 1994.

The Policy Statement on Discrimination in Lending was released in March of 1994 by the Interagency Task Force on Fair Lending. It was issued jointly by the Federal Deposit Insurance Corporation, U. S. Department of Housing and Urban Development, U. S. Department of Justice, Office of the Comptroller of the Currency, Office of Thrift Supervision, Board of Governors of the Federal Reserve System, Federal Housing Finance Board, Federal Trade Commission, National Credit Union Administration, and Office of Federal Housing Enterprise Oversight.

The policy statement was issued to provide guidance about what the agencies consider in determining if lending discrimination exists. The policy statement discusses what constitutes lending discrimination under the Equal Credit Opportunity Act and the Fair Housing Act, answers questions about how the agencies will respond to lending discrimination, and outlines what steps lenders might take to prevent discriminatory practices.

In a series of questions and answers it also explores what criteria will be employed by the federal banking regulatory agencies in taking enforcement actions or seeking remedial measures when discrimination is discovered. In addition to any referrals to the Department of Justice or HUD that may be required, the federal banking agencies are authorized to use the full range of their enforcement authority under 12 U.S.C. 1818 to address discriminatory lending practices. This includes authority to seek:

  • Enforcement actions that may require both prospective and retrospective relief
  • Civil Money Penalties (CMPs) in varying amounts against the financial institution or any institution-affiliated party (IAP) within the meaning of 12 U.S.C 1818(u), depending, among other things, on the nature of the violation and the degree of culpability

In addition to the above actions, the federal banking agencies also may take removal and prohibition actions against any IAP where statutory requirements for such actions are met.

The federal banking agencies will make determinations about the appropriateness of any potential enforcement action after giving full consideration to a variety of factors. In making these determinations, the banking agencies will consider:

  • The number and duration of violations identified
  • The nature of the evidence of discrimination (i.e., overt discrimination, disparate treatment or disparate impact)
  • Whether the discrimination was limited to a particular office or unit of the financial institution or was more pervasive in nature
  • The presence and effectiveness of any anti-discrimination policies
  • Any history of discriminatory conduct
  • Any corrective measures implemented or proposed by the financial institution

The severity of the federal banking agencies' enforcement response will depend on the egregiousness of the financial institution' s conduct. Voluntary identification and correction of violations disclosed through a self-testing program will be a substantial mitigating factor in considering whether to initiate enforcement action. In addition, the federal banking agencies may consider whether an institution has provided victims of discrimination with all the relief available to them under applicable civil rights laws.

The federal banking agencies may seek both prospective and retrospective relief for fair lending violations.

Prospective relief may include requiring the financial institution to:

  • Adopt corrective policies and procedures and correct any financial institution policies or procedures that may have contributed to the discrimination
  • Train financial institution employees involved
  • Establish community outreach programs and change marketing strategy or loan products to better serve all sectors of the financial institution' s service area
  • Improve internal audit controls and oversight systems in order to ensure there is no recurrence of discrimination
  • Monitor compliance and provide periodic reports to the primary federal regulator

Retrospective relief may include:

  • Identifying customers who may have been subject to discrimination and offering to extend credit if the customers were improperly denied
  • Requiring the financial institution to make payments to injured parties

Restitution: This may include out-of-pocket expenses incurred as a result of the violation to make the victim of discrimination whole, such as: fees or expenses in connection with the application; the difference between any greater fees or expenses of another loan granted elsewhere after denial by the discriminating lender; and, when loans were granted on disparate terms, appropriate modification of those terms and refunds of any greater amounts paid.

  • Requiring the financial institution to pay Civil Money Penalties (CMPs)

The banking agencies have the authority to assess CMPs against financial institutions or individuals for violating fair lending laws or regulations. Each agency has the authority to assess CMPs of up to $5,000 per day for any violation of law, rule or regulation. Penalties of up to $25,000 per day are also permitted, but only if the violations represent a pattern of misconduct, cause more than minimal loss to the financial institution, or result in the gain or benefit to the party involved. CMPs are paid to the U.S. Treasury and therefore do not compensate victims of discrimination.

  • Other Affirmative Action

The federal banking agencies also have the authority to require a financial institution to take affirmative action to correct or remedy any conditions resulting from a pattern or practice. The banking agencies will determine whether such affirmative action is appropriate in a given case and, if such action is appropriate, the type of remedy to order.

CONCLUSION

A FINAL WORD

The closing recommendation of this guide is perhaps the first step that an institution should take to ensure equal treatment of loan applicants. Stereotyping others can lead to often unintentional differences in treatment which, in turn, may lead to illegal discrimination. Although prohibited lending discrimination may be unintentional, it is, nevertheless, against the law. Multicultural awareness, race, gender, and handicap sensitivity training should be provided to all levels of a financial institution's personnel. It can give them insight into how they may stereotype others who are different and, perhaps, treat them less favorably. An ounce of prevention is worth a pound of cure. As a first step, taken with the others proposed in this guide, it can help to prevent illegal lending discrimination.

Last Updated 07/28/1999 supervision@fdic.gov