APPLICABILITY AND SCOPE
The purpose of this policy statement is to articulate the views of the Division of Banks ("Division") concerning discrimination in credit, the need for licensed mortgage lenders to aggressively detect and eliminate discrimination, to indicate what the Division expects of the licensed mortgage lenders it supervises, and to give guidance on how licensed mortgage lenders can meet these expectations. In addition, this policy statement will identify how the Division will assess a licensed mortgage lender's performance with regard to fair lending including but not limited to the requirements of the federal Equal Credit Opportunity Act, Home Disclosure Act, and the Massachusetts Predatory Home Loan Practices Act (M.G.L. c. 183C), as added by SECTION 6 of Chapter 268 of the Acts of 2004.
DISCRIMINATION IN CREDIT
The federal Equal Credit Opportunity Act ("ECOA") regulations (12 CFR 202 or "Regulation B") and G.L. c. 151B prohibit discrimination on the basis of race, color, religion, national origin, ethnic origin, sex, marital status, age, or because all or part of the applicant's income derives from a public assistance program. These regulations apply not only to mortgage lending, but also to every other type of credit. Chapter 151B of the Massachusetts General Laws further prohibits discrimination for mortgage applicants on the basis of sexual orientation or handicap.
NEED TO DETECT AND ELIMINATE DISCRIMINATION
Both the mortgage lender industry and the mortgage lenders' supervisory agencies are faced with the many challenges of discrimination. Overt discrimination is easily recognized and quickly condemned. Where it exists, discrimination today is far more likely to be in subtle forms, or even unintentional. This is an area in which the industry and the regulators must work together.
Bias and prejudice must not impact the decisions to grant credit in a sound and fair manner including the pricing of mortgage loans. Discrimination will not be eliminated without the complete support and assistance of a licensed mortgage lender's board, management and staff. The Division has developed examination procedures to enable its examiners to detect discrimination more effectively. The Division will work aggressively to detect discrimination and will bring suspected cases of discrimination to the attention of the appropriate law enforcement authority.
- WHAT THE DIVISION EXPECTS
- All licensed mortgage lenders are expected to incorporate fair lending as a goal in their loan policies. Licensed mortgage lenders must work proactively to eliminate any potentially discriminatory policies, practices or procedures.
- The Division has developed specific criteria which licensed mortgage lenders may use to detect and eliminate discriminatory policies and practices. Each recommendation should be reviewed to determine how it can be tailored to fit an individual licensed mortgage lender. Specific recommendations should be adopted and implemented if not already in place. Licensed mortgage lenders are encouraged to be innovative in their implementation of the specific recommendations which follow.
- STAFF TRAINING
Staff training is an important step in addressing discrimination. Training should naturally focus on compliance with fair lending laws and regulations. In addition, the programs should convey the board's and/or senior management's commitment to fair lending and to the elimination of potentially discriminatory policies and practices. Training programs should be held on a regular basis with all staff to ensure that employees are familiar with their responsibilities to treat everyone in a fair, uniform and non-discriminatory manner. The training programs should include topics such as diversity training to eliminate potential personal bias.
Licensed mortgage lenders should review their compensation structures for all employees to ensure they are not designed in such a way as to encourage disparate treatment of loan applicants. This may include incentives which could result in discouraging loans of small dollar amounts, steering, or packing loans with additional products and closing costs.
PRICING AND UNDERWRITING STANDARDS
Licensed mortgage lenders should have a clear written policy which outlines the loan pricing process. This policy should detail the factors that can affect loan pricing, including but not limited to credit profile of the applicant, property type, loan-to-value ratios, debt-to-income ratios and any other factors considered by the lender in determining the interest rate, points and fees to be charged. Licensed mortgage lenders should establish internal control procedures to ensure that the determination of interest rates and points and fees charged is consistent with established policy. Licensed mortgage lenders should also ensure that all loan pricing decisions are well documented. Licensed mortgage lenders should review their loan pricing policy on a regular basis for continued appropriateness and relevance to the current lending environment.
In addition, Massachusetts General Laws (M.G.L). c. 183, s. 64 prohibits lenders from using underwriting standards which are "arbitrary or unsupported by a reasonable analysis of the lending risks associated with a residential mortgage transaction." Underwriting standards should be reviewed to determine whether they arbitrarily exclude prohibited basis groups from qualifying for a mortgage. Licensed mortgage lenders should also be aware that they must apply credit application assistance in a fair and consistent manner. This in no way implies that a lender should not use sound underwriting standards when considering a loan application. Underwriting practices should be clear and similar to industry standards.
Licensed mortgage lenders will be held responsible for any activity performed on their behalf by their employees or agents. Due diligence on employees and agents should be performed on a regular basis to ensure compliance with federal and state laws and regulations.
Every licensed mortgage lender is expected to regularly review its marketing strategy, which may include but is not limited to, call programs to agents, or solicitations via the telephone, mail, internet, facsimile or text messaging. A lender should be able to explain its targeted marketing strategies and marketing techniques, particularly in those instances where it appears that certain products are marketed to different geographic areas or segments of the population.
SECOND REVIEW PRACTICES
All mortgage lenders in Massachusetts are required to refer denied applicants to the Mortgage Review Boards (M.G.L. c. 167, s. 14A). These boards provide a second review process for denied applicants who believe that they were unfairly turned down. However, prior to the issuance of an adverse action notice, mortgage lenders should have an independent internal process to review the application to determine whether the mortgage lender's application procedures were followed fairly and consistently. In addition, denied applications should be compared with approved applications to determine whether or not compensating factors were applied fairly and consistently.
INTERNAL CONTROL PROCEDURES
Licensed mortgage lenders should have a comprehensive audit and oversight system in place to ensure that disparate treatment of applicants is not taking place in any aspect of the mortgage process.
As part of its internal control procedures, licensed mortgage lenders should implement complaint resolution systems to effectively document and promptly respond to complaints from consumers.
To further ensure that loan policies and procedures are not discriminatory as well as for quality control purposes, a licensed mortgage lender should consider self-testing or a comparable alternative to ensure compliance with fair lending regulations.
ASSESSMENT OF FAIR LENDING IN THE EXAMINATION PROCESS
The Division uses the examination process as means of detecting suspected discriminatory practices in mortgage lending. The Division has adopted this policy with regard to the review for compliance with fair lending regulations pursuant to M.G.L. c. 255E, Section 8.
The Division will review a licensed mortgage lender's compliance with fair lending laws and regulations as part of its examination process. The Division will examine each lender for compliance with the federal Equal Credit Opportunity Act, Fair Housing Act, Home Mortgage Disclosure Act, M.G.L. c. 151B, and the Massachusetts Predatory Home Loan Practices Act during its regularly scheduled examinations/inspections for compliance with consumer protection laws and regulations. The Division may also conduct targeted examinations for compliance with applicable fair lending laws and regulations. The areas which the Division will examine for discrimination include, but are not limited to the following: marketing techniques; loan pricing, the types and terms of credit available; staff compensation; pre-application policies and procedures; the soundness of underwriting standards and the consistency of their implementation; interviewing techniques; third party involvement (e.g. brokers, lawyers and appraisers) and notification practices. Not only will the Division review all aspects of the credit process for evidence of discrimination, but it is also expected that licensed mortgage lenders will review them as well.
FAIR LENDING ENFORCEMENT POLICY
All cases of suspected discrimination will be referred to the appropriate law enforcement agency.
G.L. c. 255E, Section 8