Consumer Compliance Outlook – HELOC Plans: Compliance and Fair Lending Risks When Property Values Change
Written by Bernadette Clair, Regulatory Compliance Counsel
Consumer Compliance Outlook. The Third Quarter 2013 issue of the Philadelphia Federal ReserveâÂÂs Consumer Compliance Outlook is now available. Articles in this issue include:
Today, I want to highlight the article HELOC Plans: Compliance and Fair Lending Risks When Property Values Change. This article provides an excellent overview of the compliance requirements and issues that can arise when taking action on a HELOC because of a change in property value. In addition to providing an overview of Regulation Z requirements and potential adverse action notice requirements, the article highlights potential fair lending considerations. From the article:
âÂÂThe ECOA, as implemented by Regulation B, and the Fair Housing Act (FHA), as implemented by 24 C.F.R. Part 100, apply during all stages of credit transactions within their scope â not simply at origination. Thus, a lenderâÂÂs decision to review consumer HELOC accounts because of declining property values or to restore a HELOC account when real estate prices rise has fair lending implications. In particular, the manner in which HELOC accounts are selected for review could increase the risk of disparate treatment or disparate impact on a prohibited basis. Disparate impact occurs when a creditor implements a facially neutral policy that disproportionately harms borrowers on a prohibited basis.18 Disparate treatment occurs when a creditor treats borrowers differently on a prohibited basis, such as on the basis of race or gender.19 For example, assume a lender originated HELOCs in two counties that both had significant declines in property values. County A is majority-Hispanic while County B is majority-non-Hispanic white. If the creditor only undertook HELOC reviews in County A, it would have increased the risk of disparate treatment.
Discrimination risk may also be present when different methods are used to value properties to determine whether a significant decline occurred. Using the example described above, if a lender used AVMs in County A while conducting full appraisals in County B, the fair lending risk would be elevated. Finally, a creditorâÂÂs discretion in any aspect of the credit transaction, including collection activity, increases fair lending risks. For example, if a lender has the ability to override a decision to suspend a HELOC, the manner in which that discretion is exercised could raise fair lending concerns.
To manage fair lending risks, lenders should ensure that policies are uniformly applied to all affected borrowers. In addition, lender discretion to override a decision to take action on a HELOC plan should be documented and closely monitored to ensure that similarly situated borrowers are treated consistently. To manage disparate impact risk, lenders can analyze whether a proposed policy or action will negatively and disproportionally impact borrowers on a prohibited basis and, if so, whether the lender has a business justification. The Interagency Fair Lending Examination Procedures are available to creditors to assist in analyzing fair lending risks.20
Strong control systems can also help manage risks. Examples of risk controls include policies and procedures approved by the institutionâÂÂs board that comply with applicable regulations and staff training on the regulatory requirements. Regularly monitoring compliance can confirm that board-approved procedures are implemented, followed, and work as intended. Exceptions to policies and procedures should be appropriately approved, documented, and monitored to help ensure consistency among borrowers. Finally, monitoring customer complaints and providing metrics on consumer HELOC actions can help senior management oversee the process more effectively.âÂÂ
(Footnotes omitted)
Check out the full article here.