Regulatory compliance in financial services requires continual vigilance and never-ending attention to detail. We’ve seen a lot of new regulations in recent years, and implementing those new requirements has taken a great deal of time and effort.
But we can’t let our guard down in adhering to long-standing rules. Case in point: The Equal Credit Opportunity Act (ECOA).
Adopted by Congress in 1974, ECOA, as implemented by Regulation B, prohibits financial institutions from discriminating against loan applicants based on race, color, religion, national origin, gender, marital status, age, income derived from any public assistance program, or their exercise of any right under the Consumer Credit Protection Act.
Penalties for violating ECOA, intentionally or unintentionally, can be quite severe, as a small community bank in southeast Texas recently discovered.
According to information filed in a lawsuit against Nixon State Bank by the U.S. Department of Justice, the $69 million asset bank (with total equity capital of $6.65 million) gave its loan officers broad discretion in making loan decisions.
The bank did not require a written application or credit report, use a uniform pricing system such as a matrix or rate sheet, or document the reasons for loan denials. In 2006, an independent auditor identified those flaws and recommended that the bank develop more consistent policies and procedures.
Nixon State Bank did take action on those recommendations in 2009. But by then the Federal Deposit Insurance Corp. had turned over the results of its examination of the bank’s ECOA compliance to the Justice Department, which filed a civil suit alleging a pattern of discrimination against Hispanic loan applicants by requiring them to pay consistently higher rates than other borrowers.
On the same day the lawsuit was filed in June, the Justice Department filed a motion for a proposed order for the court to sign, indicating the parties had reached an agreement even before the suit was filed.
Under the proposed order, the bank doesn’t acknowledge any wrongdoing, but it agrees to:
- Train its loan officers on fair lending practices and monitor their performance;
- Revise its loan pricing policies;
- Create a $100,000 fund to compensate victims of past discrimination; and
- Submit regular compliance reports to the Justice Department for the next four years.
This case underscores several significant considerations for credit unions, name that federal regulators have their collective eye on financial institutions of all sizes.
The nation’s biggest banks have commanded headlines in recent years, but regulators haven’t been sidetracked from oversight of compliance at smaller banks and credit unions.
In addition, violations of ECOA and other laws and regulations carry heavy penalties in terms of fines, required operational overhauls, and intense scrutiny—not to mention the potential damage to reputation among existing and potential members.
Credit unions aren’t immune to these kinds of action. It’s imperative that credit union executives review their processes, compensation plans, pricing matrices, loan officer pricing discretion guidelines, and any other process that may result in a review and a referral to the Department of Justice.
This cautionary example calls to mind American author Finley Peter Dunne’s observation that “politics ain’t beanbag.” Neither is regulatory compliance.
Failure to comply with laws and regulations—from the plethora of new rules coming out of the nation’s capital to the foundation of consumer financial services regulation established four decades past—will result in serious penalties that won’t just bounce off harmlessly.