Are You Treating Every Member Fairly?
There has been a lot of discussion over the last couple of years among credit unions related to fair lending and disparate impact. Beyond the debate over who has regulatory power over who, and whether the testing procedures are even accurate, many credit union lenders believe that they would be safe in the event their credit union was examined for disparate impact. They believe this because they, flat out, do not discriminate against members in protected classes. Since loan pricing, in most cases, is based solely on credit score, members with the same credit score – regardless of class – get the same rate. If this were only true, and along with price, were the only considerations being made in relation to fair lending. Then perhaps, the lender may be safe in their assumptions. The fact is, CU Direct’s Advisory Services has found disparate impact in every portfolio that has been tested.
That said, what is particularly troubling is that many credit union lenders are satisfied with this conclusion because since their intentions are good, there is no possible way they could treat members differently based upon race, sex, age or marital status. But, in actuality, that is the definition of inadvertent disparate impact; disparate impact that is unintentionally created. Previously, there has been an assumption that a lender was immune from liability if they could prove that there was a legitimate, non-discriminatory reason for a policy that might inadvertently create a disparate impact. However, a recent U.S. Supreme Court ruling potentially broadens that risk by stating that it is not necessary to prove intent and that a suit can be brought based merely on the existence of disparate impact, intentional or otherwise. The only way a credit union can know for sure if members are treated fairly is to conduct a test. There are a number of common myths related to fair lending that credit unions need to be aware of:
Myth 1: My credit union is too small to be concerned about disparate impact.
If you take this position because the CFPB does not regulate credit unions, you may be in for an unwanted surprise. The NCUA and some state regulators have begun randomly conducting fair lending exams at credit unions across the country. Credit union employees have reported that the exams were made difficult to the point of not understanding some of the questions that were being asked of them. As a result, they didn’t have the relevant data available to defend their position. Further, the recent Supreme Court decision opens a door for consumers to bring suits directly against credit unions. The last thing a lender wants is to have a plaintiff’s attorney inquire about the controls and testing they have in place to prevent disparate impact — and not be able to respond.
Myth 2: My credit union doesn’t allow auto dealers to mark up the rate.
While rate markup is a concern, as it does not offer the same price to all borrowers — and carries a strong risk of disparate impact — it is important to know that this is not the only circumstance that can cause pricing disparities. For example, does a credit union have a higher rate for longer term loans than it does for shorter term loans? Often, low income borrowers require a longer term, so that their payments are affordable and their debt-to-income ratio is in line with lending guidelines. If lower income borrowers are made up of a higher percentage of minority races, then it would stand to reason that a higher percentage of minority borrowers would pay more for a loan from the credit union than non-minority buyers, even if they have the same credit score. One might say this is justified by the higher risk of loss associated with longer term loans, but this may not be the case. A recent study of indirect lending portfolios by CU Direct actually showed that loans with terms greater than 72 months had lower loss ratios than loans with terms less than 72 months.
Myth 3: Our credit union only does business with a small group of reputable auto dealers that promise to treat our members fairly.
It’s great when a credit union looks out for its members, but in doing so, it may also be creating a disparate impact. What if a credit union has decided to work with a single, franchise dealer group that has internal controls that prevent inadvertent disparate impact? That makes it easy, right? But what if that group’s stores are located in parts of the city where the population is made up primarily of Caucasians? In that case, the dealer’s customer base race distribution will not necessarily mirror the credit union’s field of membership race distribution. The dealer is probably in the clear, but the credit union is not. The credit union’s application distribution by race might be disparately impacted.
Myth 4: We give rate discounts to our existing members coming through indirect. They deserve it because of their loyalty.
This is probably the worst fallacy of all. Whenever or however someone becomes a member of a credit union doesn’t change the fact that they are a member. Credit unions have always prided themselves in the “one member – one vote” philosophy. Here’s where the problem lies: let’s say that a credit union was once a single-SEG credit union, and the membership was made up primarily of white males who worked for that SEG. Now the credit union has switched to a community charter and is expanding its field of membership. It stands to reason that most of the people who would qualify for the existing member discount would be white male applicants. This again, could create inadvertent disparate impact.
Preferred treatment causes almost everyone to bristle, no matter what race or sex they are. No one wants to think or feel that others are getting preferred treatment, and it only makes matters worse when that special treatment creates a disadvantage. This obviously goes against everything that credit unions were founded on. Credit unions want, and need, to treat every member with the same level of respect and access to products and services. This may, in fact, be the case, but how will credit unions know if they never test for it? CU Direct’s Lending Advisory Services offers fair lending analysis that tests loan application data for disparate impacts to applicants in protected classes.
For information about conducting a fair lending analysis for your credit union, contact Michael Cochrum, Executive Lending Advisor at [email protected].