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Dealer Loan Portfolios & Fair Lending Concerns
Answer by David Dietrich, EVP Fair Lending Products , PCi
Question: The bank I work for has a huge dealer loan portfolio and works directly with a large number of dealers.
We recently rolled out a "Preapproved Program" in which dealers are allowed to pre-approve loans on the bank's behalf using bank issued guidelines. They are also considering expanding the pre-approved program to include our mortgage broker relationships. I have been searching for articles that discuss indirect loans and fair lending concerns and cannot locate any.
Can you recommend any resources I can use to develop a management presentation that outlines the "fair lending concerns" associated with these activities? In addition, is there a checklist any where that can be used as review outline of fair lending issues/concerns to consider as management continues to develop new and/or more competitive loan programs?
Answer: Managing a portfolio with third party originations presents several challenges from a fair lending perspective. Historically, financial institutions have gotten into trouble when they did not provide sufficient oversight into the broker's or dealer's treatment of discretionary pricing. A noteworthy example of this is the Delta Funding Corporation settlement from March of 2000. The case illustrated that Delta's brokers charged higher fees, on average, to African-American females compared to similarly situated white males. Even though Delta Funding did not set these prices or fees, they yielded to the discretionary prices charged by the mortgage broker and therefore shouldered the responsibility. Much has been written about the Delta Funding case as well as the posture adopted by regulatory and enforcement agencies on third-party originations in the Roslyn Savings Bank case of 1998.
Many lenders mitigate this risk by getting to know the third parties that they work with, and ensuring that the capacity for discretionary pricing is being monitored. Oftentimes lenders will employee caps for overages, a threshold for the prices above which they will not accept loans or dealer paper. Both the Roslyn and Delta cases show that the onus is with the financial institution, and not the TPO, to ensure that they are obtaining loans in compliance with the fair lending laws.
This article from the FRB San Francisco expresses viewpoints from several experts regarding more specific do's and don'ts on this subject.
PCi Corporation is the leading provider of compliance risk management solutions that ensure financial institutions fully comply with the Community Reinvestment Act (CRA), the Home Mortgage Disclosure Act (HMDA), fair lending and anti-predatory laws, as well as the National Flood Insurance Reform Act. More than 90 of the nation's top 100 banks, numerous community banks, and many of the federal and state regulatory and enforcement agencies rely on the company's compliance products, data, and services. More information about PCi can be found at www.pciwiz.com.
First published on BankersOnline.com 8/18/03
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