The NCUA and Consumer FinancialProtection Bureau have placed more emphasis on Fair Lending laws and Home Mortgage Disclosure Act data collection in 2013, and credit unions can expectadditional rules and exams in 2014.

Some are also anticipating the anti-discrimination reporting andcompliance could be expanded to apply to auto financing, businessloans and credit cards, which could change the way credit unionslend to members.

The CFPB announced in July it will begin writing a proposed rulethis month to amend HMDA to require significantly more informationfrom lenders, as mandated by the Dodd-Frank Act. In addition to alaundry list of loan terms information, lenders may also berequired to provide identifiers for loans, parcels and loanoriginators.

“The CFPB expects to begin developing proposed regulationsconcerning the data to be collected and appropriate format,procedures, information safeguards and privacy protections forinformation compiled and reported under HMDA,” the regulator saidwhen it announced its rulemaking agenda earlier this year.

The CFPB also said it may consider additional revisions to itsregulations to accomplish the purposes of HMDA.

CUNA Mutual Director of Regulatory Compliance Bill Klewin saidthe CFPB, along with federal agencies like the Department ofJustice and Department of Housing and Urban Development, have takenvery active roles in pursuing fair lending cases, specificallyusing data to determine by disparate impact if lending practices havea disproportionately adverse impact on minorities.

Klewin said the agencies have turned to disparate impact testsbecause obvious discriminatory acts of the past, such as refusingto lend to women solely on the basis of gender or requiringminority borrowers to sign loan documents in person, aren't asprevalent today.

“There's this inherent, insidious way of discriminating againstpeople that's really hidden and hard to find, but it's stillthere,” Klewin said.

However, Klewin said credit union field of membershiplimitations cause most credit unions to produce HMDA statisticsthat would often define them as statistic outliers compared tolenders who serve the general public. When a lender is branded withthat statistic outlier title, it may also prompt a review byauthorities.

In March, the NCUA released a Letter to Federal Credit Unionsthat outlined its updated fair lending exam program and wasaccompanied by a new Fair Lending Guide that addressed compliancerequirements for HMDA, the Equal Credit Opportunity Act and FairHousing Act. All credit unions with more than $42 million in assetsas of Dec. 31, 2012 must file HMDA data if they had an office in aMetropolitan Statistical Area and originated at least one purchaseor refinance mortgage during 2012, according to the NCUA.Additionally, all credit unions with fewer than $10 billion inassets are subjected to fair lending laws.

In the letter, the NCUA said federal credit unions that are HMDAoutliers and demonstrate the potential for higher fair lending riskcould be subjected to a fair lending exam.

Next Page: FOM Not a Factor

NCUA Director of Consumer Compliance Policy and OutreachTonya Sweat said the regulator, which must follow the same fairlending procedures as other regulators, does not take field ofmembership limitations into consideration when reviewing HMDA dataand other factors to determine if a fair lending exam is necessary.During an April 2013 webinar on the topic, she also said that acredit union's status as a HDMA outlier would make the differencebetween the NCUA conducting an offsite supervision contact oronsite fair lending exam.

“I'll have to be honest with you, the data we are looking at andthe comparisons that we make include the data that is filed bybanks and others who are required to file under the Home MortgageDisclosure Act,” Sweat said during the webinar. “So I know somepeople might be thinking are we only looking at federal creditunions exclusively when we're determining HMDA outliers, and theanswer to that is 'no.'”

Sweat later explained during an interview that all regulatorshave a statutory obligation to regulate and enforce fair lendinglaws, regardless of the regulated entity's charter. However, shecautioned that HMDA data is only one method regulators use toidentify discriminatory practices.

Other factors include any fair lending violations revealedduring safety and soundness exams, the credit union's recent CAMELrating and other risk factors that include the volume, types orcomplexity of lending products and services, the types ofcommunities the credit union serves and if the lender has been thesubject of any lending discrimination complaints.

However, if a credit union is selected for a fair lending exam,Sweat said field of membership is taken into consideration as theNCUA conducts its scoping review, in which the examiner researchesthe credit union's operations, which includes the market it serves.Only after the NCUA's exam could a credit union be referred to HUDor DOJ for further enforcement of fair lending violations, sheadded.

Field of membership restrictions are defined by legislation andNCUA rules, said Olympia, Wash.-based consultant Marvin Umholtz,but they are in conflict with fair lending laws.

“That's going to be an incentive to either force a credit unionto become a community credit union, or there may be some statutorychanges that will eliminate field of membership,” he said.

At the very least, both Klewin and Umholtz said the new emphasison disparate impact will influence how credit unions lend tomembers.

For instance, Klewin said the CFPB's qualified mortgage rulesmake small dollar mortgages unprofitable for some credit unions,which is a valid business reason.

“But the examiner and DOJ could argue disparate impact hasoccurred, even though there was no intention to discriminate,”Klewin explained. “Credit unions could counter by saying there's noother way to meet that legitimate business need, but then you'd getcaught in a tit for tat situation where the government would say,'yes there is, you need to do lending the following wayinstead.'”

Umholtz said he thinks credit unions will tighten up lending toinfluence their HMDA statistical outcomes.

“The new assertiveness of the NCUA, CFPB, Justice Department,HUD and others will make this a big influence in 2014,” Umholtzsaid. “Even state regulators will be looking at this exam hotbutton flavor of the year.”

He added that disparate impact will be included on a short listof items examiners will be incentivized to look at next yearbecause regulators, including the NCUA, have been scolded in thepast for not doing enough to prevent discrimination.

Sweat said fair lending exams are risk focused, and as a result,only 55 to 75 federal credit unions would receive either a fairlending examination or offsite supervision contact in 2013.

Next Page: An NCUA Q&A

In a question and answer sheetreleased with the NCUA's Fair Lending Guide, the agency said duringoffsite supervision, Office of Consumer Protection staff wouldreview the credit union's lending policies, procedures, trainingprogram, audit or verification assessments, compliance riskassessment, and marketing or advertising program or materials. Atthe conclusion of the supervision, the NCUA would provide in aconference call an oral report of findings and recommendations tosenior management and officials. Federal credit unions would alsoreceive a written report of the results within three to fivebusiness days of the call.

A fair lending exam would require credit unions to prepare itemslisted by the NCUA in its notification letter. The exam would alsoinclude a loan officer questionnaire, information about productsand services and data in an electronic format detailing approvedand denied loans.

Another issue for credit unions is the lack of clarityregarding how they can determine if they are in compliance and howto plan for a fair lending exam.

“You can do self-exam testing and you may determine you're goodwith a solid risk-based matrix and sound credit scoring system, butif you produce data that indicates disparate impact, that might notmatter,” Klewin said.

Sweat said during the webinar the NCUA does not share withfederal credit unions the tool it uses to determine if a lender isan HMDA outlier, but added the regulator would share the reports itgenerates with a credit union if it were selected for additionalfair lending supervision.

“No matter whether you're going through a fair lendingexamination or whether you're going through an offsite supervisioncontact, (our goal) is to educate federal credit unions about fairlending compliance,” Sweat said. “So we're not going to hide theball from you, if that makes sense. We will share with you theinformation that we have regarding your HMDA data and allow you touse it to make improvements or enhancements, if necessary, to yourfair lending compliance program.”

Umholtz said DOJ settlements of fair lending violations looklike they were designed to extract money from lenders after thegovernment threatened the institution with reputation risk.

Umholtz also said he's worried the credit union community hasn'tpaid enough attention to disparate impact issues and afterregulators start writing up institutions for compliance exceptions,it will be too late.

“It will be so imbedded in the exam process, the NCUA, CFPB andeverybody else will be hard to disrupt unless the Supreme Courtacts to force the government to modify its position,” he said.

In June, the Supreme Court agreed to hear Mt. Holly GardensCitizens in Action v. Mt. Holly, a case involving thegentrification of a New Jersey neighborhood that is the first casechallenging disparate impact that has reached the nation's highestcourt. The court is not expected to rule on the case until nextyear. Sweat said until that case is resolved, the NCUA wouldcontinue to abide by current fair lending regulations and examprocedures.

During the April 4 Webinar, NCUA Consumer Affairs Analyst KenBailey said fair lending supervision is not considered materialsupervision determinations and therefore are not eligible for theregulator's formal appeal process. If a credit union disagrees withits fair exam report, it may only request that the OCP review itsconcerns; only the OCP director can resolve any concerns ordisputes, he said.

The CFPB is moving forward not only with new HMDA rules but alsowill examine the lending practices of auto financers that Klewinsaid could have many credit unions shuttering their indirectlending programs to avoid disparate impact issues.

“The NCUA will, in all likelihood, fall into line and examineindirect lending programs because the CFPB has taken the positionthat if you're an indirect lender, you're a creditor and subject tofair lending laws,” he said.

NAFCU Senior Regulatory Affairs Counsel Tessema Tefferisaid his trade association supports fair lending, and added thatcredit unions are second to none in ensuring their lendingpractices are conducted in a fair and non-discriminatory manner.However, he said NAFCU takes exception to the CFPB's actions inindirect lending.

“(It) essentially treats the auto dealer as a third-partyservice provider of the credit union, increasing a credit union'srisk for liability and giving the CFPB a way to reach auto dealersin the absence of direct statutory authority,” Tefferi said.

Umholtz called the emphasis on disparate impact good intentionsgone wild, and said the practice won't have the results itssupporters think it will.

“It will be the ugliest unintended consequences when it hitsfull bore, and the NCUA is only a small part of it,” he said.