Regulatory Bulletin  1.3-106 Community Reinvestment and Fair Lending Policy

Date:	03/29/2013
Referenced Sources:	G.L. c. 167, s. 14 209 CMR 46.00 G.L. c. 255E, s. 8 209 CMR 54.00

1.0 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 state-chartered depository institutions and state licensed lenders (regulated lenders) to aggressively detect and eliminate discrimination, to indicate what the Division expects of the lenders it supervises, and to give guidance on how lenders can meet these expectations. In addition, this policy statement will identify how the Division will assess a regulated lender’s performance with regard to fair lending compliance including but not limited to the requirements of the federal Equal Credit Opportunity Act (ECOA) and Home Mortgage Disclosure Act (HMDA); and the Massachusetts Predatory Home Loan Practices Act (M.G.L. c. 183C). The statutory and regulatory community reinvestment (CRA) criteria under the lending test for large depository institutions, the streamlined procedures for small depository institutions and the Lending Test for certain licensed mortgage lenders will also be presented as well as clarifying the role of CRA in the regulatory application process.

2.0 Discrimination in credit

ECOA regulations (12 CFR 1002 or Regulation B) and G.L. c. 151B prohibit discrimination on the basis of race, color, religion, national origin, sex, and age. ECOA adds prohibition of discrimination because all or part of the applicant's income derives from a public assistance program and to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. Chapter 151B of the Massachusetts General Laws further protects mortgage applicants on the basis of gender identity, sexual orientation, genetic information, ancestry or handicap. These regulations apply not only to mortgage lending, but also to every other type of credit, including small business lending. Fair lending on the part of institutions enhances the communities they serve and increases their volume of business. Therefore, fair lending also helps to expand the economy.

3.0 Need to detect and eliminate discrimination

Both the industry and the regulated lenders’ supervisory agencies are faced with the many challenges of potential discrimination. Overt, intentional 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 the loan. Discrimination will not be eliminated without the complete support and assistance of a regulated 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 may bring suspected cases of discrimination to the attention of the appropriate law enforcement authority.

4.0 What the Division expects

All state-regulated lenders are expected to incorporate fair lending as a goal both in their written loan policies as well as in their mission statements. However, simply having fair lending as a goal is not enough. Institutions must work proactively to eliminate any potentially discriminatory policies, practices or procedures.

The Division reviews a regulated lender's compliance with fair lending laws and regulations as part of its examination process. The Division will vigorously examine each state-regulated lender for compliance with the Equal Credit Opportunity Act, the Community Reinvestment Act and the Home Mortgage Disclosure Act, as applicable. Areas which the Division will examine for discrimination include, but are not limited to the following: customer and community outreach and education; marketing techniques; the types of credit available; staff composition; pre-application policies and procedures which affect loan application flow; the soundness of underwriting standards and the consistency of their implementation; interviewing techniques and the consistency of counseling; 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 institutions will review them as well.

The Division has developed specific criteria which regulated 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 institution. Specific recommendations should be adopted and implemented if not already in place. Institutions are encouraged to be innovative in their implementation of the specific recommendations which follow:

1. 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 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, including the board, and especially those who interact with the public, to ensure employees are familiar with their responsibilities to treat everyone in a fair, uniform and non-discriminatory manner. However, the training programs should also include topics such as diversity training or multiculturalism to develop an appreciation for all racial and ethnic cultures and reduce potential personal bias.

2. Staff Composition and Compensation

   All institutions should review their hiring and promotional practices. By maintaining a staff with diverse backgrounds and language proficiencies, a regulated lender may have an advantage in opening untapped markets by gaining a better understanding of the needs of its customers. Input from a diverse staff may result in marketing programs which are particularly effective in attracting applications from all segments of the market area. This is especially true for those institutions located in areas with changing demographic compositions.

   In addition, institutions should review their compensation structures for loan originators and 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 packaging loans with additional products and closing costs.

3. Outreach

   An effective program to ascertain the credit needs of the assessment or market area is crucial for a regulated lender to understand what its market is and how it can best serve that market. If a regulated lender establishes a presence in minority and/or non-English speaking communities, it can better understand the needs and concerns of those communities. That also makes good business sense. An effective ascertainment program can also have the benefit of helping to attract new customers by informing the community of the credit services the institution offers.

4. Credit Products, Pricing and Underwriting Standards

   As part of its ongoing CRA efforts, as applicable, a regulated lender should regularly review its credit products to determine whether those products are helping to meet the credit needs of all segments of the regulated lender's assessment or market area. These efforts should include an analysis as to whether the credit products the regulated lender currently offers are those which the community actually needs, as discerned through its ascertainment efforts. If the regulated lender is not doing an effective job in reaching all segments of the assessment area, the regulated lender should consider offering alternative lending products, including the use of innovative or flexible lending practices in a safe and sound manner.

   There are many programs which an institution can develop or participate in to assist customers who do not necessarily meet all of the standard lending criteria without sacrificing prudent underwriting standards. Certain secondary mortgage market purchasers, such as Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) have demonstrated flexibility in their mortgage loan programs and have developed underwriting standards which could enhance lending efforts in minority, low- and moderate-income and non-English speaking communities.

   Regulated lenders should have a clear written policy which outlines the loan pricing process. This policy should detail the factors affecting 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 regulated lender in determining the interest rate, points and fees to be charged. Regulated lenders should establish internal control procedures to ensure the determination of interest rates, points and fees charged is consistent with established policy. Regulated lenders should also ensure all loan pricing decisions are well documented. Regulated lenders should review their loan pricing policy on a regular basis for continued appropriateness and relevance to the current lending environment.

   Institutions are reminded that 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 protected classes from qualifying for a mortgage. Regulated lenders should also be aware they must apply credit application assistance in a fair and consistent manner. This in no way implies a regulated lender should not use sound underwriting standards when considering a loan application. Underwriting practices should be clear and similar to industry standards.

   Regulated 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.

5. Marketing

   Every regulated lender is expected to have a sound and effective marketing strategy and to regularly review its strategy for appropriateness and effectiveness. A regulated 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.

   All businesses must attract new customers in order to prosper. A regulated lender must ensure its marketing efforts reach all segments of its assessment or market area. Advertising strategies should reflect the racial composition of the community which the institution serves.

   A physical presence in minority and low- and moderate-income communities is an extremely effective means to market and deliver financial products and services. Regulated lenders should address the problem of access to financial services by reviewing their office locations and hours as well as services, including house calls to prospective loan applicants. Also, in areas where there is a significant non-English speaking population, regulated lenders should make an effort to market their credit services using bilingual means. In addition, regulated lenders should make every attempt to inform residents of their credit services in the forum they feel most familiar. Contacts with community groups can be an effective marketing technique and can also serve as a valuable source of information to acquire a better understanding of credit and community development needs.

6. Credit Education

   Regulated lenders can also benefit by participating in efforts to educate consumers on the home buying and credit application processes. The consumer benefits by becoming informed about these processes. In addition, the consumer has a better understanding of both the advantages and problems associated with home ownership. The regulated lender benefits by developing a relationship with a well informed customer. Regulated lenders can hold their own credit education seminars or co-sponsor seminars with other institutions or community and social service organizations.

7. Counseling and Loss Mitigation Practices

   Regulated lenders should be aware they must apply credit application and loss mitigation assistance in a consistent manner. When any applicant or borrower requires assistance, the regulated lender should take the time to take them through the application or modification/mitigation process. Regulated lenders may also want to consider referring applicants and existing borrowers who have problems with their credit to appropriate credit counseling service providers. In addition, each regulated lender should ensure its credit standards are carried out fairly and consistently, including the application of compensating factors considered as part of the underwriting process.

8. Second Review Practices

   All mortgage and small business lenders in Massachusetts are required to refer denied applicants to the Mortgage Review Boards and the Small Business Loan Review Boards. These boards provide a valuable second review process for denied applicants who believe that they were denied for a mortgage loan based on the location of the property or unfairly turned down for a small business loan. However, prior to the issuance of an adverse action notice, lenders should have an independent internal process to review the application to determine whether the institution's application procedures were followed. In addition, denied applications should be compared with approved applications to determine whether or not compensating factors were applied fairly and consistently.

9. Internal Control Procedures

   Regulated lenders should have a comprehensive audit and oversight system in place to ensure disparate treatment of applicants is not taking place in any aspect of the lending process. As part of its internal control procedures, regulated lenders should implement complaint resolution systems to effectively document and promptly respond to complaints from consumers.

   In order to ensure policies and procedures are not discriminatory as well as for quality control purposes, a regulated lender should consider self-testing or a comparable alternative. Certainly, second review practices and regular analysis of the geographic distribution of applications and originations, as well as local demographic data, are important steps in the review of a regulated lender's practices. A regulated lender may also want to consider the use of paired testers. These testers can determine whether or not personnel at the institution are steering or prescreening applicants or showing preferential treatment to one applicant over another. If the results show disparate treatment of the testers, that may indicate evidence of discrimination. Any evidence of discriminatory practices should be dealt with swiftly and firmly by the regulated lender. Regulated lenders should also implement complaint resolution systems to effectively respond to complaints from customers.

5.0 Assessment of fair lending in the examination

The Division uses the examination process as a means of detecting suspected discriminatory practices in lending. The Division has adopted this policy with regard to the role of discrimination in the CRA examination pursuant to G.L. c. 167, s. 14 and 209 CMR 46.00 and the review for compliance with fair lending regulations pursuant to M.G.L. c. 255E, section 8 and 209 CMR 54.00.

The Division will review a 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 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 for 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) notification practices and debt collection practices. Not only will the Division review all aspects of the credit and collection process for evidence of discrimination, but it is also expected that lenders will review them as well.

With specific reference to CRA, the Division rates an institution with one of five descriptive ratings (Outstanding, High Satisfactory, Satisfactory, Needs to Improve and Substantial Noncompliance). The rating assigned by the Division reflects the institution’s record of helping to meet the credit needs of its entire community, including low- and moderate-income neighborhoods. A regulated lender’s performance relative to the fair lending policies and procedures outlined above is considered under the lending test and will be factored into the overall assigned rating for this test. Similarly, small depository institutions examined under the streamlined procedures have their performance relative to fair lending reviewed. Performance in fair lending is combined with the regulated lender’s response to complaints and assigned an individual rating. This rating is factored into the regulated lender’s overall CRA rating in accordance with 209 CMR 46.61 and 209 CMR 54.61, as applicable. Those regulated lenders which adopt and implement these fair lending policies and practices will be given a positive rating for such efforts. Conversely, those regulated lenders which fail to pursue fair lending policies and practices will be given a less than satisfactory rating in this area. (See Appendix for a profile of the individual ratings. These profiles are not exclusive.) The Division will continue to take all factors into consideration when deciding how to weigh the performance criteria. However, evidence of discriminatory or other illegal credit practices will adversely affect the Division’s evaluation of a regulated lender’s performance.

6.0 Fair lending enforcement policy

Cases of suspected discrimination may be referred to the appropriate law enforcement agency in accordance with the Division’s memorandum to examiners.

7.0 Role of CRA in the regulatory application process

The Division regularly considers applications from regulated lenders which require regulatory approval, including, but not limited to, applications to open, close and relocate branches and ATMs as well as for mergers and acquisitions. In all such transactions, a regulated lender's CRA rating is considered when deciding whether or not to approve an application. A list of regulatory applications subject to this review standard is found in 209 CMR 46.29 and 209 CMR 54.26, as applicable. Community groups may protest a regulated lender's application before the Division. However, complaints against a regulated lender should not be raised solely at the time of an application. Rather, any complaints against a regulated lender should be brought to the attention of the Division on an ongoing basis, especially if someone suspects an institution of discrimination.

8.0 Implementation

The implementation of the above criteria will go a long way in eliminating potentially discriminatory lending policies and practices. Fair lending is a goal which benefits not only the regulated lender and the community it serves, but also the individual, society and the overall economy.

9.0 Historical notes

This bulletin replaced former Regulatory Bulletins 2.3-101 and 5.3-101 on March, 29 2013.

10.0 Authority

G.L. c. 167, s. 14; 209 CMR 46.00; G.L. c. 255E, s. 8; 209 CMR 54.00.

Appendix to regulatory bulletin

OUTSTANDING

The institution has an outstanding record of developing and implementing fair lending policies and practices.

This may take the form of:

• ongoing and comprehensive training programs for all staff levels, including compliance with fair lending laws and regulations, as well as diversity training.
• ongoing review of the composition of its staff and proactive attempts to attract employees which reflect the general composition of its assessment area.
• established compensation structure which encourages loan originators to solicit applications from all segments of its assessment area with an emphasis placed on applications from low- and moderate-income borrowers.
• ongoing, meaningful and creative outreach program(s) designed to ascertain the credit needs of its entire assessment area, including low- and moderate-income areas.
• developed and available credit products designed to meet community credit needs, including products with flexible lending criteria and/or government lending programs.
• established effective and innovative marketing strategy designed to inform all segments of its assessment area, including low- and moderate-income and minority areas, of the credit services it offers.
• ongoing and meaningful participation in community lending forums to increase consumers' awareness of the lending process.
• ongoing and thorough efforts to counsel applicants through the application process and refer applicants to credit counseling.
• ongoing independent internal second review process whereby all denied applications are reviewed to ensure compliance with fair lending laws and regulations.
• established and ongoing internal control procedures, such as self-testing or a comparable program to ensure that the institution's policies and procedures are being followed and that discrimination does not play a part in the application flow, the origination and/or the credit decision process.

HIGH SATISFACTORY

The institution has a high satisfactory record of developing and implementing fair lending policies and practices.

This may take the form of:

• frequent training programs for all staff levels, including compliance with fair lending laws and regulations.
• frequent review of the composition of its staff and efforts to attract employees which reflect the general composition of the assessment area.
• established compensation structure which encourages loan originators to solicit applications from all segments of its assessment area.
• frequent contact and involvement with organizations and individuals to effectively ascertain the credit needs of the entire assessment area including low- and moderate income areas.
• established credit products designed to meet community credit needs, including products with flexible lending criteria and/or government lending programs.
• frequent efforts to market the institution’s credit services to all segments of the assessment area, including low- and moderate-income and minority areas.
• frequent participation in community lending forums to increase consumers’ awareness of the lending process.
• frequent efforts to counsel applicants through the application process and refer applicants to credit counseling.
• frequent efforts to additionally review all denied applications to ensure compliance with fair lending laws and regulations.
• frequent use of internal control procedures, such as self-testing or a comparable program to ensure that the institution’s policies and procedures are being followed and that discrimination does not play a part in the application flow, the origination and/or credit decision process.

SATISFACTORY

The institution has a satisfactory record of developing and implementing fair lending policies and practices.

This may take the form of:

• regular¹ training programs for all staff levels, including compliance with fair lending laws and regulations.
• regular review of the composition of its staff and efforts to attract employees which reflect the general composition of the assessment area.
• compensation structure which encourages loan originators to solicit applications from all segments of its assessment area.
• regular contact with organizations and individuals for the purpose of effectively ascertaining the credit needs of the assessment area.
• developed credit products, including those with flexible lending criteria and/or government lending programs.
• regular efforts to market the institution's credit services to all segments of its assessment area , including low- and moderate-income and minority areas.
• regular participation in community lending forums to increase consumers' awareness of the lending process.
• regular efforts to counsel applicants through the application process and refer applicants to credit counseling.
• regular efforts to additionally review all denied applications to ensure compliance with fair lending laws and regulations.
• use of internal control procedures, such as self-testing or a comparable program to ensure that the institution's policies and procedures are being followed and that discrimination does not play a part in the application flow, the origination and/or the credit decision process.

NEEDS TO IMPROVE

The institution needs to improve its efforts to develop and implement fair lending policies and practices.

This is represented by:

• limited training programs for compliance with anti-discrimination laws and regulations.
• limited reviews of the composition of its staff or attempts to attract employees which reflect the general composition of its assessment area.
• compensation structure may not encourage loan originators to solicit applications from all segments of its assessment area.
• limited contact with area organizations and individuals to ascertain the credit needs of the assessment area.
• no credit products which make use of flexible lending criteria and/or government lending programs.
• marginal efforts to market the institution's credit services to all segments of its assessment area. .
• minimal participation in community lending forums to increase consumers' awareness of the lending process.
• limited efforts to counsel applicants through the application process.
• limited efforts to review all denied applications to ensure compliance with fair lending laws and regulations.
• limited or no internal control procedures to ensure that the institution's policies and procedures are being followed and that discrimination does not play a part in the application flow, the origination and/or the credit decision process.

SUBSTANTIAL NONCOMPLIANCE

The institution has made no efforts to develop and implement fair lending policies and practices.

This is represented by:

• no training programs for compliance with anti-discrimination laws and regulations.
• no efforts to review the composition of its staff or attempt to attract employees which reflect the general composition of its assessment area.
• compensation structure discourages loan originators from soliciting applications from all segments of its assessment area.
• few if any contacts with area organizations and individuals to ascertain the credit needs of its assessment area.
• no credit products which make use of flexible lending criteria and/or government lending programs, even though a need for such products is evident.
• few if any efforts to market the institution's credit services to all segments of its assessment area.
• no participation in community lending forums to increase consumers' awareness of the lending process.
• no efforts to counsel applicants through the application process.
• no efforts to review denied applications to ensure compliance with fair lending laws and regulations.
• no internal control procedures to ensure that the institution's policies and procedures are being followed and that discrimination does not play a part in the application flow, the origination and/or the credit decision process.

¹ The word "regular" differs from "ongoing" and "frequent" in the degree of intensity of the program or review. This includes the comprehensiveness and frequency of the program or review and the level of resources devoted to such.