Fair Lending 101 With Subject Matter Expert Joe Goldberg

WFC 13 | Fair Lending

Fair lending guarantees that everyone has equal access to lending opportunities. This puts everyone on an even footing and avoids discrimination. In this episode, Mark Treichel speaks with Subject Matter Expert Joe Goldberg on all things related to Fair Lending. While at the NCUA, Joe supervised their Fair Lending Program. Joe knows what examiners look for, which he discusses here in great detail. Join the discussion and learn more about fair lending and how it helps credit unions.


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Fair Lending 101 With Subject Matter Expert Joe Goldberg

Thank you for joining me for this episode. I am excited that I am joined by Joe Goldberg, a member of my team and the team here at Credit Union Exam Solutions. Joe, welcome.

Mark, thanks for having me.

You bet. It’s my pleasure. Joe, for people who are not familiar with what you did at NCUA and perhaps before NCUA, as it relates to credit unions, why don’t you share that with us?

I graduated from law school in 1980. I practiced law in a lot of different ways and did different things for a long time. Among those, I was in the Pennsylvania Attorney General’s Office Bureau of Consumer Protection for almost seven years, where I took a deep dive into consumer protection matters. Among other things, I taught consumer law as an adjunct professor. Eventually, in 2014, I joined NCUA in what was then the Office of Consumer Protection in the Division of Consumer Compliance Policy and Outreach. After a couple of years, I became the Director of the division and stayed doing consumer compliance work, including fair lending work, until I retired in December of 2021.

You are joining a big group who have left NCUA recently. A lot of people hit that point in time where it is time to do something else. I am glad that you are out here assisting credit unions more directly. We are going to talk about fair lending 101. NCUA has a lot of examiners that do safety and soundness exams and then there is a structure for fair lending exams that were housed in your office. Before we get into that, when someone says fair lending, what does that mean?

There is no formal definition of fair lending but in essence, it is a system that requires decisions on applications for credit to be based solely on credit-related factors. Not on factors that are unrelated to creditworthiness and/or discriminatory. Fair lending is usually looked at by what is prohibited rather than what is required. Here is an example on HUD’s website, the Department of Housing and Urban Development, which oversees the Fair Housing Act.

Here is what it says about its website for consumers. “What is fair lending? Fair lending prohibits lenders from considering your race or color, national origin, religion, sex, familial status or disability when applying for residential mortgage loans. Fair lending guarantees the same lending opportunities to everyone.” We will see also that, in addition to that, fair lending is designed to enhance the availability of credit. I had been an adjunct law professor and when I would teach different laws and regulations, I had always liked to see why the laws were created and the purpose of the laws.

Fair lending is one of those subjects where that is generally contained right in the laws themselves. There is language in them that says why Congress passed the law. For example, the Equal Credit Opportunity Act, which is the main fair lending law, says this right in the statute itself, “Congress finds that there is a need to ensure that the various financial institutions and other firms engaged in the extensions of credit, exercise their responsibility to make credit available with fairness, impartiality and without discrimination based on sex or marital status.” The original ECOA only covered those two prohibited bases, sex or marital status.

Congress then went on to a little bit more. It says, “Economic stabilization would be enhanced and competition among various financial institutions and other firms engaged in the extension of credit would be strengthened by an absence of discrimination based on sex or marital status, as well as by informed use of credit which Congress has sought to promote.” In the Fair Housing Act, there is a language that says this, “It is not the policy of the United States to provide within constitutional limitations for fair housing throughout the United States.”

In HMDA, the Home Mortgage Disclosure Act, this is a statement of findings that Congress finds that some depository institutions have sometimes contributed to the decline of certain geographic areas by their failure pursuant to their chartering responsibilities to provide adequate home financing to qualified applicants on reasonable terms and conditions. That is a direct reference to redlining. It talks about the purpose of the chapter, which is HMDA, to provide data and other information to those who are interested in making sure that housing financing is extended on a non-discriminatory basis.

One quote I like was from President Lyndon Johnson when he proposed the Fair Housing Act as it was part of the Civil Rights Act of 1968, which was the second one. The first one was in ’64. He said, “I am proposing fair housing legislation again because it is decent and right. Injustice must be opposed however difficult or unpopular the issue.”

Some of the policy issues considered when talking about fair lending are the availability of credit, which ties into financial inclusion. That is not a credit union issue but a social issue.

There is a lot of meat there. Let’s unpack it. In a second, I am going to ask you why this is important, but before I get to that, that quote is great. I love quotes. The finding of Congress when you highlighted that on redlining, as you are reading through and discussing all of these things, I am thinking that’s why NCUA has the office that you work for, why NCUA goes out and does a certain number of fair lending examinations somewhere between 25 and 30. Before we dive into, what this means for credit specifically and how it works with NCUA, explain why these laws are so important.

There are two reasons. One is what I described, which is the right thing to do is to prevent injustice but it is also because, for those of your readers who are responsible for consumer compliance involved in consumer lending especially, you need to know what the law is because it can affect the viability of the credit union. The laws in these regulations that I am going to discuss that are fair lending-related tie into so some very important credit-related concepts. We are not talking just about mortgage lending here because the fair lending laws also apply to other types of credits such as auto lending, credit cards and personal loans. They are pretty wide-ranging.

Some of the policy issues that are considered when you talk about fair lending are the availability of credit which ties into financial inclusion. That is not a credit union issue. That is a social issue as we have learned in the last number of years. It affects equality and credit terms. It tries to ensure that credit is extended solely based on credit-related factors and no other aspects that are not credit-related. I talked about redlining and you had mentioned it, Mark. Unfortunately, there still are issues with redlining and it is important for credit unions to know about this.

Redlining is a method of excluding properties in a specific geographic area from eligibility for mortgage loans. It can also be affected by who the borrower is. There are racial implications in redlining. If these were African-Americans, they would be at a disadvantage. It was used to perpetuate segregation and deny African-Americans the ability to improve their financial standing and achieve wealth through homeownership the way that non-African-Americans could. Unfortunately, this was a government policy.

The Federal Housing Administration no longer exists in the way one originally but had an underwriting manual. There was a quote from that underwriting manual that says, “Incompatible racial groups should not be permitted to live in the same communities.” This is an official US policy. The Federal Housing Administration used color-coded maps and in those maps, the red zones were considered to be hazardous. Generally, communities that were predominantly African-American were in those red zones or were those red zones.

There are instances where the manual required walls to be built between neighborhoods.

This is no longer official government policy but there are remnants of this that predominantly affect people of color and the values of their properties. Credit unions have a different analysis of their lending when determining whether they are involved in redlining. Some people say that credit unions cannot redline because of the field of membership issue that forms the basis of their customer base and the members.

Let me throw this real-life example out. A credit union that is chartered to allow members who live or work within a specified metropolitan area and the surrounding counties. This particular credit union does not have any branches in the major metropolitan areas. The largest number of majority-minority neighborhoods are in that metropolitan area as opposed to the surrounding areas. The question can be asked if the credit union does not have a physical presence where the minority applicants or most of them cannot redline. I am not going to answer the question because there are a lot of factors that go into it, but I am throwing it out there. It is not a simple yes or no.

When someone expands into a community, that in part would explain why NCUA requires them to establish a presence or define when they are going to establish a presence as part of their business plan because if you are expanding to include an area, you should provide service to that area. You can get into the whole concept of most or a lot of banking happens on phones. There are areas and people who need to have branches to conduct business. A lack of action to have branches somewhere could be perceived as a violation. Is that an overstatement or is that something that you would agree with?

I would agree with that. You touched on something. The world and the way that people interact with financial institutions are changing but the credit union system has grown up on being community-based. Without being physically present, that can affect how your lending is dispersed.

It was sad to hear what policies were in government as recently as the 1950s. They had defined red zones. Am I right to assume that it was those red zones that may have led to the phrase redlining?

WFC 13 | Fair Lending
Fair Lending: In essence, fair lending is a system that requires decisions on applications for credit to be based solely on credit-related factors. Not on factors that are unrelated to creditworthiness and are discriminatory.

Yes. There are other issues too, which have come to light. There is a presidential initiative around appraisal bias and ways to counteract appraisal biases. This is tied into the redlining because whole neighborhoods may be subject to appraisals at lower property values and they’re self-perpetuating. NCUA has a regulation regarding appraisal accuracy and it imposes obligations on credit unions to make sure that appraisers that they use are providing appraisals that are based on non-discriminatory matters or factors. It sounds like ancient history to some extent but it is not. It is something that it is important to guard against.

The other reason why all this is important is that non-compliance creates a risk to credit unions. You can set aside all those policy issues but all these laws or regulations I am going to talk about generally have some type of enforcement provision for regulators, including the NCUA. They provide for private actions, including class actions. Several different types of risk are implicated in non-compliance with fair lending laws.

For example, I am a credit union. I am doing every type of loan that you can imagine. I am a community charter credit union and never had any issues with the normal exams but NCUA has the authority to come in and do a specific fair lending exam. That was the group that you were in charge of at NCUA. There are some authorities that NCUA has. There are some authorities that DOJ has and then HUD. Along those lines, if you were running a credit union and wanting to be ahead of the curve on NCUA coming in, poking around and taking a look at this whole arena, what would you do if you were out there running a credit union?

There are things that the credit union should focus on and can do to help protect itself.

Let’s talk about the laws and regulations that are involved with this.

The main one is Equal Credit Opportunity Act. ECOA is the acronym for those who are familiar with acronyms. It prohibits discrimination in any aspect of a credit transaction. It applies to a wide variety of extensions of credit, including extensions of credit to small businesses and also to corporations, partnerships and trusts under certain circumstances. There are two major requirements in ECOA. The first is that it expressively prohibits discrimination in any aspect of a credit transaction based on a list of prohibited basis.

There are race or color, religion, national origin, sex, marital status, age and provided that the applicant can enter into contracts, generally eighteen. The applicant’s receipt of income derived from any public assistance program and the applicant exercising good faith of any right under the Consumer Credit Protection Act. That is to prevent retaliation for an applicant who has asserted certain rights. That is the first major requirement of ECOA. This show is too sure to go into all the excruciating details but I do want to at least mention that’s the basis for it.

The second major requirement is that a creditor must provide applicants with the reason for any adverse action. What adverse action means is a denial of credit that was applied for or a denial of credit under the terms applied for. If an African American applies for a mortgage that is advertised at a certain rate or some type of term and the creditor counters says, “You do not qualify for that but here is a less favorable set of terms that you qualify for,” that is not necessarily discrimination but this must be disclosed to the applicant that the adverse action notices, the colloquial term for the disclosure of information.

I want to mention that the Dodd-Frank Act created a new section in ECOA that requires the collection of data from applications for small business credit. CFPB issued a proposed rule about what data would be collected and how it would be collected. Nothing is going to happen until that becomes a final regulation but I did want to mention that. As you raise, ECOA does provide for enforcement by regulators and the right to bring private lawsuits, including class actions. Generally, the NCUA is the enforcement agency for federal credit unions. The Federal Trade Commission was named as the enforcement agency for state-chartered credit unions.

Most of you probably know that the CFPB is responsible for the enforcement of the larger financial institutions, those with over $10 billion in assets. I do not want to get into that, but generally speaking, for federal credit unions, the NCUA is the primary enforcement agency. One other thing, the Department of Justice has certain enforcement authority but the Equal Credit Opportunity Act requires the regulators, including the NCUA, to refer to the DOJ, any financial institution it regulates where it uncovers a pattern or practice of discrimination. That is a requirement. It is that discretionary.

The world and how people interact with financial institutions are changing, but the credit union system has grown up being community-based.

When that happens during a fair lending exam at NCUA where you have determined that it has happened, NCUA must refer to DOJ?


ECOA expressively prohibits discrimination based on race or color, religion, national origin and the other items that you went through. When I think back to my exam days, a phrase that someone once said is, “You can discriminate based on income.” That is where you get the debt ratios and the ability to repay. The list of the things that ECOA protects people from being discriminated against makes sense when you look at them, you want to treat people fairly and in all of these areas. Do you have any comments relative to the statement, “You can discriminate based on income?”

You have to determine whether or not it is discrimination. This gets into a legal analysis. If it is not listed, then is it discrimination? You can use credit-related factors in making that credit determination. Income is used all the time but there are two different types of discrimination. Disparate treatment, which is where you would provide all people within a certain prohibited basis. You treat them differently. Age is most common. You are not supposed to discriminate based on age but when I was at NCUA, my people found several credit unions who had different age thresholds for certain types of credit or terms or how they were evaluated. That is disparate treatment.

Let’s use me as an example. I am not quite this age but let’s say I was 65, still working and want to get a 30-year mortgage. You might have policies that were written theoretically that might have given better opportunities to someone a little younger with the theory that a 30-year loan for a 65-year old like me is not necessarily a risk but they are also presupposing that I am not going to work until 75, 85. Am I in the right arena of what you are thinking there?

That gets a little dicey when you start talking about that. There are some exceptions when you are dealing with the adequacy of collateral and those types of things but generally speaking, that would be discrimination depending on how things are worded. ECOA does permit a creditor to treat older people differently if there is a benefit to them in the way they are treated. That is a different issue.

A credit union could have no ill will and intent but having worded things in a certain way, could be creating a situation where there is discrimination. Even though all their intent is good, they chose to write the policy in a way that, if you step back and look at it, could be discrimination.

The intent is not an element of violating ECOA. To complete the thought, the second type of discrimination is what is called disparate impact, where on its face, a rule treats everybody the same but the result is that some group on one of this prohibited basis ends up on the short end of the lending. An overwhelming majority gets credit under different terms and then the question is whether there was any business justification for what was happening. It is to eliminate discrimination that is not overt but occurs because the conditions for the extension of the credit are done in such a way that they improperly affect the people in that group.

Let me give you an analogy from the concepts of disparate treatment and disparate impact. Stepping aside from fair lending, I will give you an analogy where I am going to try and build in what you referred to as the business purpose from some things that I learned in my previous life at NCUA. The research I did relative to disparate treatment and disparate impact gave an example of being a fireman.

If a fire department could establish that a fireman or firewoman needed to have the ability to carry 30 pounds of equipment, a reasonable number that they had to carry that up to X number of flights of stairs because odds are, that is what that person is going to have to do at some juncture. That would establish the business purpose for having that requirement.

On average, a male fireman, theoretically, is going to have a better and easier ability to carry that weight. If it is set up soundly, that is a business purpose where people succeeding that test to get into the door to be a fireperson. That could create disparate impact but it would not necessarily mean that it was disparate treatment. Is there a corollary to what we are talking about here in fair lending?

WFC 13 | Fair Lending
Fair Lending: Training should be not only for those in the lending department but managers and anybody who deals with any aspect of lending, credit union management, and board members.

There is some deeper analysis that would have to be done for the fair lending context but that is essentially a good way to explain it.

The threshold and the burden of proof might be higher in fair lending.

Yes. ECOA was implemented by Regulation B. If you are looking for the regulation that contains more details, it is Regulation B. The second law is the Fair Housing Act which prohibits discrimination in all aspects of residential real estate-related transactions. That includes loans for buying, building, repairing, improving, dwelling, purchasing real estate loans, selling, brokering, appraising residential real estate and selling or renting a dwelling. The Fair Housing Act also has a list of prohibited basis but it is different from ECOA. It is only race or color, national origin, religion, sex, millennial status and handicap but you should keep in mind that ECOA also applies to mortgage-related transactions.

Even though a transaction might not fall under the Fair Housing Act, it could still fall under ECOA. It is something to keep in mind. The regulations for the Fair Housing Act are promulgated by HUD, enforced by HUD and the Department of Justice and also allow for private actions. The third major law that relates to fair lending is HMDA. The Home Mortgage Disclosure Act requires financial institutions that include credit unions to compile and disclose data about home purchase loans, home improvement loans and refinancing they originate, purchase or for which they receive applications. It does not have to be accounts with data transactions. It is relating to applications.

The purpose of HMDA is to provide the public with data that can be used to help determine whether all creditors and credit unions are serving the housing needs of their communities. It is to assist public officials in distributing public-sector investments to attract private investment to areas where it is needed and also to assist in identifying possible discriminatory lending patterns and enforcing compliance with anti-discrimination statutes. Its covers depend on certain thresholds being met in terms of lending activity. There’s way too much detail on HMDA to cover here. It’s a good subject for another session.

Finally, HMDA is implemented by Regulation C. Originally, it was a Federal Reserve Board regulation. It is now CFPB regulation. Let me mention a couple of other laws and regulations that are important. I did mention the NCUA non-discrimination regulation and the appraisal regulation. The non-discrimination regulation prohibits discrimination in real estate lending and real estate appraisals and advertising by federal credit unions. I also want to mention two other laws, which are lumped together with fair lending laws even though technically they are not.

One is the Servicemembers Civil Relief Act or SCRA and the other is the Military Lending Act. The Servicemembers Civil Relief Act applies to certain transactions entered into before the onset of active duty. The Military Lending Act applies to certain transactions that are entered into by active duty service members or their dependence. Although I did say that they were technically not fair lending laws or regulations, that is not true in some states because some states have anti-discrimination laws that include a prohibition against discrimination of someone based on military status. You could have lent to service members be a fair lending matter in certain states.

If you were out running a credit union, what would your focus be and how would you do your best efforts to protect members and the credit union?

The very first thing is whoever is going to be in charge of consumer compliance or fair lending must know the law. They do not have to be an expert in the law but they need to read it and the regulations so that they understand that if something happens, a light bulb will go off, “I remember there is something in the Fair Lending Act or HMDA. I better go look at it to see.” Knowing the law is very important and that ties into the second thing, which is that the credit union should have a robust compliance management system.

The consumer compliance management system is important because that affects those transactions dealing with members. There is no requirement that the CMS has separate policies and procedures for fair lending but when I was at NCUA, we recommended that credit unions do because of the significance of fair lending. What it means to credit unions members, is you are better served and the members will be better served. There is a separate fair lending policy. Those in the credit union who deal with fair lending are very clear about their obligations.

Credit unions as a whole do a good job with fair lending. The attitude of most credit unions is that they are there to help their members.

Part of a robust CMS is adequate training. Training should be not only for those in the lending department but managers and anybody who deals with any aspect of lending, also credit union management and board members. They have responsibility for policies and procedures and what happens in the credit union. There has to be adequate rules oversight within the credit union over the lending practices so that if there are issues of fair lending management, we will be able to see them.

Finally, the last thing is oversight over third parties that the credit union deals with. Indirect lenders who the credit union has relationships with, especially car dealers, because auto financing tends to be troublesome on several different levels. Also, vendors are the people who are creating the systems that the credit unions are using for lending purposes. You need to have an understanding of how they work. You do not have to know how the programming works or the code but you do have to have some understanding of that.

There are a lot of great ideas but Joe, as you walk through those, I can highlight that you and I might need to do some separate episodes on several or all of those specific categories, from knowing a lot of CMS to training. That is something I am looking forward to doing a deeper dive on sometime in the future.

I got two other points. One, I do want to talk about the NCUA’s fair lending program, the Office of Consumer Financial Protection and the division that I was Head of, the Division of Consumer Compliance Policy and Outreach. There are dedicated examiners to conduct the full fair lending exams. There had been 30 a year. The board approved the hiring of a couple of additional fair lending personnel for 2022, so that number is going to increase. In addition to those full-blown fair lending examinations, there are also what is known as supervision contacts.

Prior to COVID, those were considered to be off-site as opposed to the onsite examinations. They are more targeted, not as lengthy and often based on analysis of the HMDA data. In addition to those dedicated fair lending exams and supervision contacts, every year, the field examiners who are doing the general exams of credit unions are also looking at several consumer compliance areas. Each year, there are some fair lending aspects to those targeted review areas.

For 2022, the NCUA supervisory priorities letter says, “Examiners will identify fair lending policies and practices that indicate discrimination of risk or loan portfolio and underwriting discrimination. In addition, examiners will assess whether a credit union has policies and procedures to evaluate the consistency, fairness and accuracy of the appraisals it obtained.” That is the general description of the targeted fair lending reviews and all exams in 2022.

Let me paraphrase. Correct me if I misstate anything. The standard exam that credit unions are used to seeing, generally speaking, the priority letter that you referred to are the topics that those examiners may have some discussions with the credit union during the contact. Within the office that you worked at, there are the fair lending exams and supervision contacts. It sounded like the supervision contacts could come from looking at HMDA data.

At NCUA, there is some analysis of the HMDA data that may trigger a supervision contact which is more of a rifle approach of a contact and then there are the full fair lending exams. Am I right or wrong to assume that those fair lending exams might be where it is a random sample where NCUA comes up with who won the lottery and who is going to get a fair lending exam? That would be more of a random sample that would not necessarily be driven by any data.

It depends. Each year, the agency would look at anything that field examiners may have found during the previous year. Occasionally, we will get information from whistleblowers. There was information that was obtained from either states or other federal agencies. It was not random. There could have been information that was obtained during the supervision contact in a prior year.

Some of those federal lending examinations are based on information obtained that indicated there could be a fair lending problem. There was a desire to look at some of the larger credit unions and possibly some of the smaller ones. It was not quite random for those who worked there because there was some information obtained but to some extent, yes.

WFC 13 | Fair Lending
Fair Lending: The more credit unions educate themselves, the better off they and their members will be.

Joe, if someone was wondering what the best resources out there on the world wide web for wanting to study this area and enhance their operations in this area, where would you refer them to?

The first thing I would look at if you are a federally insured credit union would be the NCUA fair lending guide, which is on the NCUA’s website. There is also the NCUA federal consumer financial protection guide. That guide contains all of the interagency-approved examination procedures. Those two resources will help. The NCUA fair lending guide was undergoing updating some revisions at the time that I retired at the end of 2021. At some point, there will be a new version of that, but those two things are very helpful.

The FFIEC, Federal Financial Institution Examination Council, which is a group of federal regulators, is responsible for collecting HMDA data. There are several HMDA resources on the FFIEC.gov website. The CFPB has a lot of fair lending and HMDA resources on its website. Finally, for those of you who receive the NCUA regulatory alerts and letters to credit unions, I would recommend looking at those. They are all archived on the NCUA website but every year, there are several regulatory alerts geared to HMDA and occasionally, there will be 1 or 2 dealing with federal lending as well. Those would be the primary resources I recommend credit unions use.

Joe, before we wrap up this episode, are there any final words that you want to share with the audience?

From my experience, credit unions as a whole do a good job with fair lending. The attitude of most credit unions is that they are there to help their members. The overwhelming majority of the problems with fair lending that were uncovered while I was there was not out of intent but out of ignorance of the requirements of the several laws and overreliance on vendors and lack of training. That is why I mentioned the compliance management system requirement. Credit unions try to get it right but they do not always do that. The more they could educate themselves, the better off they and their members will be.

Joe, I want to thank you for being available here for me and credit unions. That is it for this episode. I hope you join me next time for this show.

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