Question & Answer

Question: If we have a commercial customer that we believe may be violating the Fair Housing Act, is the bank also liable? Is it any different if we have already made the loan and discover the problem later?

Answer: This is a tough one. The answer simply isn't clear because no-one has pushed it yet. However, there are several rules of thumb that a prudent lender should follow. First, you must consider safety and soundness. Violating any law - whether the Fair Housing Act or laws on environmental protection or public safety - makes the customer an undesirable customer. Whether or not the law is interpreted to make the lender liable as well as the borrower, the fact is that the borrower is doing business in a way that violates the law. The borrower is therefore at risk and that risk can quickly turn into default.

Now for the tougher question. Does the bank have to play enforcement officer in such a situation? Again, there is not a clear answer. You should exercise reasonable judgment. For example, if you find out about the borrower's intents or practices before making the loan, you should look into the situation carefully. Discuss the Fair Housing Act with the applicant. Do what is reasonable to make sure the applicant understands the legal requirements and consequences. If you have concerns about the applicant's future compliance, don't make the loan.

It can be more difficult when you come across this kind of information after the loan is made. Here again, you should call the problem to the borrower's attention and provide them with information on compliance. While your regulatory agency does not expect you to call the loan on this basis, you should proceed carefully from this point on. By itself, the Act does not make you the enforcer. However, you should not get in any deeper than you already are. Make this clear to the borrower. Future lending to this customer could be construed as participation in the discrimination. Thus, to protect the safety and soundness of the loan, you should do what you can to prevent discrimination by the borrower.

Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3 , No. 5 & 6, 4/98