Thread Options
#2246091 - 12/02/20 09:31 PM Charging higher fees to some borrowers
Compliance Nut Offline
Member
Joined: Feb 2016
Posts: 94
If a lender operates in multiple states, where MSAs cross over state lines, and charge the maximum fee allowed (which are different in each state), is there a fair lending concern because some borrowers will be charged higher fees than others who might be located in the same MSA?

Return to Top
Fair Lending
#2246127 - 12/03/20 05:22 PM Re: Charging higher fees to some borrowers Compliance Nut
Inspector Offline
100 Club
Joined: Apr 2016
Posts: 214
The fair lending issue would be if this fee difference would result in some type of disparate impact, for example one side of the MSA has a high hispanic population and the other side doesn't. While this is unlikely to line up cleanly, it would be your potential concern. I am not sure how strong the business justification would sound to say that you want to charge the most allowed in each state.
_________________________
Opinions expressed are my own and do not reflect legal advice or the opinions of my employer.

Return to Top
#2246138 - 12/03/20 08:35 PM Re: Charging higher fees to some borrowers Compliance Nut
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,231
Bloomington, IN
I am not sure how strong the business justification would sound to say that you want to charge the most allowed in each state.

I concur with that statement.

If I live in state A on Main St. and my son lives in state B on Main St. and the state line runs down the middle of Main Street how do you justify charging me a $500 processing fee and my son a $750 processing fee simply because he lives on the other side of the street? Does it really cost you an additional $250 to process his loan?
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#2246161 - 12/04/20 02:00 PM Re: Charging higher fees to some borrowers Compliance Nut
Inherent_Risk Offline
Gold Star
Joined: Jan 2017
Posts: 307
I don't see the fair lending issue here. The bank would have charged you $750 if it could. The fact that state A doesn't allow that is not even a bank decision it's a law.

Are banks required to charge the lowest fee allowed in any state they lend in? Otherwise, why would your son get charged $500 in state B, when someone in the county over outside the MSA get charged $750. That would seem even more of a fair lending concern as the bank could have charged the son $750, but chose not to. Following applicable state laws seems like a very legitimate business need to me.

I think many banks are charging late fees and other state controled fees based on the applicable state law. I've never heard of it being an issue, and dont really see how it could be. People in state B should talk to their state reps.

Return to Top
#2246176 - 12/04/20 04:54 PM Re: Charging higher fees to some borrowers Compliance Nut
RockChucker, CAMS Offline
Diamond Poster
Joined: Jul 2013
Posts: 1,526
The Country
Sounds like one of those banking ideas that makes people hate banks.
_________________________
A successful man is one who can lay a firm foundation with the bricks others have thrown at him.
-David Brinkley

Return to Top
#2246180 - 12/04/20 05:49 PM Re: Charging higher fees to some borrowers Compliance Nut
Dan Persfull Offline
10K Club
Dan Persfull
Joined: Aug 2002
Posts: 46,231
Bloomington, IN
Following applicable state laws seems like a very legitimate business need to me.

Regardless what the maximum allowable fees are the bank cannot just pull a number out of the hat and charge that fee. The fee has to be bona fide and reasonable.

From 1026.19/

4. Bona fide charges. In covered transactions, § 1026.19(e)(1)(i) requires the creditor to provide the consumer with good faith estimates of the disclosures in § 1026.37. Section 1026.19(e)(3)(iii) provides that an estimate of the charges listed in § 1026.19(e)(3)(iii) is in good faith if it is consistent with the best information reasonably available to the creditor at the time the disclosure is provided and that good faith is determined under § 1026.19(e)(3)(iii) even if such charges are paid to the creditor or affiliates of the creditor, so long as the charges are bona fide. For determining good faith under § 1026.19(e)(1)(i), to be bona fide, charges must be lawful and for services that are actually performed.

Can you justify the additional $250 simply because the applicant lives in a different MSA and the state maximum fees allow it? What additional services are you providing for the $250?
_________________________
The opinions expressed are mine and they are not to be taken as legal advice.

Return to Top
#2246184 - 12/04/20 06:14 PM Re: Charging higher fees to some borrowers Compliance Nut
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 75,723
Galveston, TX
I agree - the bank should have a specific return on investment in mind when making a loan. The costs of making the loan in one State versus another State might be different, but whacking one set of customers an extra $250 just because they can under State law is not a valid business need justification.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#2246194 - 12/04/20 07:19 PM Re: Charging higher fees to some borrowers Compliance Nut
burkemi Offline
Gold Star
Joined: Nov 2013
Posts: 444
Where is the line drawn?

In scenario 1, we have 2 branches of the same bank operating in different states. State A allows $500, State B allows $750. But because State A only allows $500, that is the maximum that should be charged by the branch in State B????

Scenario 2 - 2 different banks. State A allows $500, State B allows $750. The Bank in State in State B is going to charge $750. What business argument does that bank have to justify the fee? I really see no meaningful difference. So why should the 2nd branch of the same Bank be penalized?
_________________________
I reject your reality and replace it with my own.

Return to Top
#2246195 - 12/04/20 07:27 PM Re: Charging higher fees to some borrowers Compliance Nut
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 75,723
Galveston, TX
I think you are missing the point. If your branch in State A represents non-protected class people and your branch in State B represents protected class people, then pointing to State law alone for a pricing difference is not going to be a legitimate business need. If your costs are the same, you are still charging the protected class people a higher fee for no justifiable reason.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#2246208 - 12/04/20 09:47 PM Re: Charging higher fees to some borrowers Compliance Nut
Inherent_Risk Offline
Gold Star
Joined: Jan 2017
Posts: 307
I have not been able to find much good guidance on business necessity, and I don't think there is much, so I'm happy see this discussion.

From the little guidance I do see, a lender doesn't have to justifiy making money for a business necessity. To the contrary, they just have to show that following the practice makes them more money, and that there isn't a less discriminatory way to do so.

I think the example we are using here brings in a lot of extra noise, and does not seem likely to be a practice many banks would employ. In addition to the bonafide fee issue, which isn't really a fair lending issue (the $750 fee wouldn't be bonafide regardless of whether the bank was lending in other states that didn't allow it). There's the practical consideration that if they did increase fees in this manner, they would likely allow for a reduction in rate in order to maintain target profitability (and to remain competitive in the market), which would likely make the whole discussion moot. If they didn't, then competition would likely be the problem. There might not be a business justification, simply because it wouldn't make business sense to do so. That said, I think if a bank could show that they make more money by charging the higher fee, then they have a business justification.

I think a more real world example would be whether it is a fair lending issue to charge maximum late fees based on applicable state laws?

I don't see this as the bank whacking one set of customers for an extra $X because they can. I think the bank is not charging $X in another state because they can't due to a state law. I think it's a fair assumption that but for the state law limiting the fee, the bank would charge the higher fee in all states. If a bank can charge for a fee under state laws, then I don't think fair lending laws say they can't just because it's not allowed in a different state they lend in. Does a lender that only lends in the state without a fee limit get to charge higher fees just because they don't operate in the other state?

Return to Top
#2246211 - 12/04/20 09:57 PM Re: Charging higher fees to some borrowers Compliance Nut
rlcarey Offline
10K Club
rlcarey
Joined: Jul 2001
Posts: 75,723
Galveston, TX
This whole thread is just a theoretical discussion in my mind anyway and based on the original post, it totally depends on whether the demographics within the specific MSA vary based on the State line. If they do not, then this whole discussion is probably moot.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com

Return to Top
#2246266 - 12/08/20 01:48 PM Re: Charging higher fees to some borrowers Compliance Nut
InFairness, CRCM Offline
Gold Star
InFairness, CRCM
Joined: Nov 2010
Posts: 429
USA
Any differences in pricing within an MSA raises potential fair lending risk but that won't become actual unless there's an adverse impact on a prohibited basis. There are some MSAs where this could occur. For example, the Clarksville, TN-KY MSA crosses state lines, but the majority of minority residents appear to be on the TN side. If a lender charged a higher fee in Tennessee, there could be disparate impact. The Columbus, GA-AL MSA, the Augusta-Richmond County, GA-SC MSA, the Lake County-Kenosha County, IL-WI metro division, and the St. Louis, MO-IL MSA have similar situations. I'm sure there are others too.
_________________________
Opinions are strictly my own, and have nothing to do with my employer.

Return to Top