Risk in risk-based lending

In the summer of 1999, I worte an article extremely critical of a risk-based consumer lending policy which was being considered by my credit union board. My position raised some eyebrows and body temperatures among my peers and I was duly chastised and censured. I am concerned that credit unions are adopting a total membership consumer loan risk-based lending policy not out of compassion for members who could not qualify under the old loan policy, but rather to reprice their products in order to offer the lowest risk members a more attractive rate. I went so far as to say that a certain type of risk based lending should not even be legal in credit unions. Well, maybe it is not. Time to drop the other shoe. Credit Union Magazine of October, 1999, pages 39 and 40, contained an article by Valarie Moss, director of compliance information in the regulatory affairs department of CUNA's legal division. The article was concerned with risk based lending and the Equal Credit Opportunity Act. The article stated "credit unions that cannot justify and support pricing differences based on risk will face heightened compliance and reputation risk if pricing decisions appear to result in disparate treatment under consumer protection regulations." The article further states, "With regard to fair lending there are basically three recognized forms of discrimination: overt, disparate treatment and disparate impact." Under disparate impact the article says, "When a lender applies a policy or practice equally to credit applicants, but the policy or practice has a disproportionate adverse impact on applicants from a protected group, the policy or practice is described as having a disparate impact." A credit union's program can be challenged on a theory of disparate impact if more onerous credit terms are disproportionately applied to members of a protected class. The September 22, 1999 edition of the Detroit Free Press published an article containing the results of a survey funded by mortgage lender Freddie Mac. The survey was conducted by five historically black colleges and universities to study the credit situation and covered over 12,000 consumers with annual incomes up to $75,000. According to the survey about half of African Americans consumers have bad credit records, regardless of how much they earn. Based on the information in these two articles, I would conclude that there is a question whether some credit unions are in violation of the Equal Credit Opportunity Act. I attempted to get a legal opinion from my league and was advised to check with our bonding company. I think that would be prudent advice for all credit unions engaged in risk based lending. A suit brought against credit unions by a protected group could tarnish our image as the good guys in the white hats. John Livingstone Member Telcom Credit Union