Andrew Sandler has for decades been an expert in a legal area virtually without precedent.
This is not to say that the well-respected banking attorney ranks without peer, but that a specialty that developed for him almost on the bounce—fair-lending law—lacks the body of precedents—appellate court decisions that can be cited in legal argument—seen in many other areas of law and compliance.
“There’s virtually no case law out there,” Sandler explained during a session at the recent 2014 ABA Regulatory Compliance Conference. Typically fair-lending cases and actions filed by the Justice Department or other federal legal authority have been settled, going back to the landmark Decatur Federal Savings settlement of 1992. That case actually started during the presidency of George H.W. Bush. Sandler, now chairman and executive partner at BuckleySandler LLP, represented lenders in many of those early cases and he continues to play a major role in these actions.
After a perceived lull during the George W. Bush Justice Department years, fair-lending suits picked up again, but the pattern of settlement in lieu of decisions continued. (Actually, in a June 2009 ABABJ article Sandler himself pointed out that that Administration’s alleged inaction was overplayed.) Sandler has been involved in the negotiations of about half of the fair-lending enforcement actions settled that he and fellow speakers reviewed that have been handled since April 2012.
Problem with settlements: no instruction
As has long been the case, the most recent crop of settlements have been “heavy on aspiration,” according to Sandler, “but low on guidance.”
“There has not been a lot of change in the regulatory space” on fair-lending, said Sandler. “So we need to learn from enforcement actions. I think that is what CFPB is doing, too.” The bureau has made a number of referrals to the Justice Department and taken other fair-lending action. [Read latest CFPB fair-lending report to Congress.]
However, Sandler said that much can be learned by reviewing the cases. Lessons were discussed by Sandler and fellow panelists Cara James, senior vice-president and director of group compliance at Arvest Bank, Tulsa, Okla., and Carl Pry, managing director, Treliant Risk Advisors.
In the sampling below of cases covered during the trio’s session the date in parentheses represents the announcement of each settlement. Links are provided to relevant federal web pages.
SunTrust Mortgage, Inc. (5/31/12)
This case arose as a referral from a Federal Reserve exam. The issue was overages taken in mortgage lending involving approximately 20,000 African-American and Hispanic borrowers. The Fed found that in some markets these minorities were not charged overages, and that in some areas, more was being taken from white borrowers. However, in aggregating all of the bank’s mortgage lending—including retail, broker, and wholesale lending—the Fed found that the minorities paid more—in the range of 12 to 20 basis points more.
Panelists noted that the 1990s Fleet Mortgage settlement indicated that differences of less than 25 basis points fell into a safe harbor. This later case underscores that “we are at zero tolerance” now, according to the panel.
The lesson in this case concerns unbridled pricing and the need for monitoring of what lenders are doing, said Arvest’s James. She said that SunTrust had fixed some of the issues on its own before the settlement was reached. While the Justice Department did not assess any civil penalty, the negotiations called for a settlement of $21 million.
Wells Fargo Bank, NA (7/12/12)
This case didn’t arise from a regulatory referral to Justice, but instead from a class-action suit against the lender that the department learned of. (Fair-lending law permits private suits as well as governmental ones.)
The Justice Department alleged that Wells Fargo engaged in a pattern or practice of discrimination against qualified African-American and Hispanic borrowers in its mortgage lending from 2004 through 2009. Specifically, the lender was accused of steering 4,000 African-American and Hispanic borrowers into subprime loans, rather than prime options, on the basis of their race and origin rather than on the basis of creditworthiness. The government charged that similarly qualified non-minority borrowers received prime loans. Other statistical disparities affecting pricing of loans to 30,000 other customers were also alleged.
The settlement agreed on came to $175 million—and, in the event, it climbed still higher. Arvest’s Cara James noted that the government claimed that Wells had been aware of a problem with steering in its wholesale mortgage lending channel and had taken insufficient action to put an end to it. The panel advised that lenders look carefully at complaints received about their lending channels, as well as any actual litigation.
“Steering matters—all of our products have to be at play, for all of our customers,” is the message in this case, according to the panelists. A corollary to the lesson, from the panel: If your organization includes a finance company, it will be essential to be sure that approved applicants won’t also qualify for mainstream bank credit.
GFI Mortgage Bankers [8/27/12]
This pricing case, arising from around 600 loans made to African-Americans and Hispanics, alleged statistical disparities in pricing of loans to those groups. Sandler said that the disparity rates were high, “more like what we used to see,” and that there wasn’t much of a compliance program in place. A civil penalty of $55,000 was assessed plus remediation coming to $3.5 million.
Sandler said that GFI, a small lender, initially attempted to litigate. However, he said, “the magnitude of the discovery demands—the government brought down its full force—made it impossible for the small lender to pursue the case by making it astonishingly expensive for that lender to do that.” After GFI’s motion to dismiss the case was denied, it had little choice but to settle, said Sandler.
James said that GFI admitted to providing incentives to loan officers to charge higher rates and fees and yet were providing no monitoring to be sure there weren’t disparities in pricing. She said it is critical for Compliance to understand how employees are compensated, to avoid compliance pitfalls.
Bank of America [9/13/12]
The previous cases, Sandler said, involved traditional mortgage issues. However, a key issue in this case is the role of Social Security Disability Insurance income in mortgage credit evaluation. This has been a significant issue for the Department of Housing and Urban Development and the subject of many current investigations, Sandler said.
HUD referred results of this particular investigation to the Justice Department, which alleged violations of the Federal Housing Act and the Equal Credit Opportunity Act. In this case, Bank of America was alleged to have violated the acts by requiring, as a condition of obtaining a mortgage, that four applicants provide a letter from their doctor to document Social Security Disability Insurance income. Individual complaints triggered the HUD inquiry.
There was no civil penalty in this case, which the government had referred to as involving “invasive requests,” according to Arvest’s James. However, under terms of the settlement, the bank had to spend $125,000 on remediation, with the amount paid to each affected applicant hinging on the amount of information the bank had requested. For example, applicants asked to merely have their doctor verify income information received lower payments from the bank than did those whose doctors were asked to provide detailed health information.
“This case is about training and understanding how important complaints can become,” said James. Besides making the payments, James said, Bank of America agreed to revise its policies on disability income requests and to teach underwriters how to handle such issues in the future.
“It’s not much about what’s actually legal and illegal under the law as much as it is how the regulators are interpreting your obligation,” said Sandler. “Often management says, ‘Show me where it says we can’t do that.’ That is the wrong thing to say unless you are prepared to litigate with your regulator insofar as there is nothing that says you can’t do that, but they still think you can’t do that. So you have two options. Be prepared to litigate. Or understand that today’s view of your regulators is the view you have to live up to.”
Disability income isn’t the only such stumbling block, pointed out Treliant’s Carl Pry. Secondary market agencies and other players may have requirements that can trigger issues with HUD or the Justice Department.
Sandler said that an alternative way of dealing with such issues is to find workarounds through enhanced underwriting methods.
One angle, he said, is to find acceptable credit factors that correlate with ones that the government doesn’t like in order to avoid discriminating while maintaining a qualified credit perspective.
Community State Bank [1/15/13]
Sandler said this case shows the new meaning of a “redlining” situation. Historically, redlining referred to the practice of physically using a red line to map out parts of a market where loans would not be made, out of concern about lending risk within the red lines, he explained. Today, said Sandler, the issue has evolved, as a matter of law, so that redlining refers to failure to reach out and make the same effort throughout the community the bank serves.
“What this has morphed into is [the expectation of] equalized performance in every community,” said Sandler. “Are you equally servicing each community in which you operate?”
Added Sandler: “This is probably the most aggressive and inappropriate use of fair-lending laws among all the issues that we’ve talked about.”
Sandler said the impact is that banks are expected to have the same market penetration in minority neighborhoods as in white neighborhoods.
However, he said, this expectation does not reflect reality for community banks operating in urban areas.
“The big banks are under enormous pressure to have good penetration in urban and minority neighborhoods, and they will go in with essentially subsidized lending and they will soak up whatever homebuyer opportunities there are,” said Sandler.
By comparison, said Sandler, community banks results will look weak. Sandler said banks must be prepared to challenge examiners who cite poor performance in certain census tracts. In his experience, on investigation, some allegedly underserved areas will turn out to be zones with little housing of any kind—such as railroad yards and cattle lots.
Arvest’s James said it was important, however, for a bank to evaluate its own performance and, where gaps are found, determine if there are steps the bank can take to do better. She added that acquirers need to see how the lending profile of their institution and the potential acquisition match up, on a pro forma basis. “This synchs up with the Community Reinvestment Act, too,” she said.
A troublesome issue identified by the panel is the definition of the bank’s assessment area. Sandler said it is not uncommon for one regulator to tell the bank to expand its assessment area—the zone on which its performance will be judged—and for another regulator to later come in and criticize the bank for underperformance—“redlining”—based on that new assessment area.
One unavoidable rule of fair-lending enforcement and regulation, said Sandler, is “that no good deed goes unpunished.”
“You can have the best ‘Outstanding’ CRA program in the country, and if they decide you have a redlining or another fair-lending problem, they will whack your CRA rating down to ‘Needs to Improve’.”
Community First Bank [3/18/13]
Allegations of reverse discrimination lie behind this case, which resulted from an OCC enforcement action that resulted in a settlement including $73,000 in remediation.
This Maryland bank, to avoid discrimination in pricing involving women and minorities, implemented a policy of capping lender compensation on loans to both groups. Inadvertently, this caused higher charges to whites and married couples, and the Comptroller’s Office called that discriminatory.
Sandler, discussing this finding and the resulting OCC consent order, noted that consent decrees involving indirect lending to auto loan borrowers specifically mandate bringing down prices to minority borrowers if they are found out of synch with non-minority borrowers.
“I’m trying to figure out the difference between that and this case,” said Sandler. James pointed out that the indirect auto cases came from the Consumer Financial Protection Bureau, but Sandler retorted that he wasn’t going to let OCC “off the hook,” as it was involved in those cases.
The lesson Sandler drew from the case was that setting policies that treat protected groups more favorably is not a compliant solution to the disparate impact issue. James said the case stresses yet again the importance of understanding how a bank’s compensation program interacts with its pricing scheme.
Luther Burbank Savings [9/12/12]
“This is my personal favorite as the worst fair-lending consent decree in the history of the free world,” said Sandler.
The attorney said that the institution had strictly been a commercial lender, but had been told by its regulator to diversify. So the bank did so by inventing an interest-only negative amortization large mortgage product that was intended for a particular high-net-worth niche able to handle such credit. The product was not marketed out of that demographic band, which Sandler said should have been commended.
However, the regulator wanted to know what its market share was in low- and moderate-income communities, and with solely that offering, the bank had none. Sandler said the government told the bank it ought to have had an appealing alternative product for use in those communities. The bank spent $2 million on remediation, with no civil penalties.
Since then, Sandler said, regulators seem to have determined that things went too far in this case. He said institutions now may be able to document why a product doesn’t make sense in some markets. As a substitute, the bank could document other things it is doing to be good banking citizens in those markets.
However, Sandler added this caution: “If you offer a medical student something that you don’t offer a truck driver, you are at risk.”
National City Bank [12/23/13]
This case was the first fair-lending mortgage action resulting from a referral to the Justice Department by CFPB. Sandler noted that it was an example of how an acquirer can inherit fair-lending liability. He traced the history of the case:
“The federal government begs PNC to acquire failing Nat City in 2009. PNC buys Nat City. Nat City’s mortgage company wasn’t functioning at the highest level when it came to compliance. PNC comes in with a state-of-the-art fair-lending program and the best reputation for compliance in the mortgage space in the country. Flash forward five years later, what happens? CFPB and the Justice Department make PNC pay a bunch of money because in the period between 20032008, Nat City had [alleged] loan pricing disparities.”
The case turned on disparate impact on African-American and Hispanic borrowers, violating ECOA, and required $35 million in remediation payments.