Bank Settlement Highlights Thorny Discrimination Issue
The legal experts at Farleigh Wada Witt weigh in on a recent settlement between the Department of Justice and Bank of America.
Editor’s Note: The following is a contributed piece co-authored by Jon Himes and Hal Scoggins of credit union law firm, Farleigh Wada Witt, on a recent Bank of America settlement regarding discriminatory lending.
A U.S. District Court in New York recently approved a settlement between the U.S. Department of Justice and Bank of America regarding allegations that the bank discriminated against individuals with disabilities who sought mortgage or home equity loans.
The DOJ’s complaint was based on bank policies that allegedly prohibited loans to persons for whom a guardian or conservator had been appointed (“protected persons”). The DOJ’s enforcement action and the resulting settlement illustrate the need to tread carefully and evaluate loan requests based on individual circumstances rather than establishing a blanket policy of denying loans to protected persons.
The Fair Housing Act prohibits discrimination on the basis of disability (which includes both physical and mental impairments) in real estate lending. The DOJ alleged that persons with disabilities are substantially more likely to be subject to guardianships or conservatorships than persons without disabilities. The DOJ alleged that the bank’s policies resulted in denial of loans to qualified borrowers with disabilities even when a guardian or conservator provided court documentation expressly authorizing them to borrow and mortgage property on behalf of the protected person. In other words, the denial of the loan was allegedly made on the basis of the disability.
Bank of America agreed to pay $4,000 per loan to eligible loan applicants affected by the policies in question. The settlement also requires the bank to implement non-discriminatory underwriting policies and train its employees on the new policies. The bank must also monitor its loan processing and underwriting activities to ensure compliance with the Fair Housing Act.
Implications for Credit Unions
“Incapacity” is one of the justifications for a court to establish a guardianship or conservatorship. Thus, credit unions may rightly be concerned about a protected person’s capacity to sign a binding loan agreement.
Neither the FHA nor the Equal Credit Opportunity Act (implemented through Consumer Financial Protection Bureau Regulation B) prohibit credit unions from denying a loan if the individual lacks capacity. However, if a conservator or guardian has explicit authority to borrow and to grant a security interest in the protected person’s assets, the applicant’s capacity is not an issue. The basis for the guardianship or conservatorship, and the actual scope of a guardian’s or conservator’s authority to act on behalf of the protected person, will vary from case to case. For that reason, if a guardian or conservator approaches the credit union to request a loan to the protected person, the credit union should obtain a legal review of the guardianship or conservatorship documents.
Although Regulation B does not prohibit discrimination on the basis of disability, state public accommodation and fair lending laws may be broad enough to do so. Credit unions should therefore apply the same policies to both consumer loan requests and real estate loan requests by protected persons. Underwriting considerations must be based on non-discriminatory factors. Permissible factors that underwriters may consider include:
- Mental capacity. Can the borrower enter into a binding contract?
- If the guardian or conservator has the power to borrow, or if the protected person does in fact have capacity, do they actually have the capability to pay the loan?
- Capacity to repay includes income, assets, and obligations. Note the credit union may not base its lending decision on the fact that income includes disability income, but the credit union may take into account any limitations on income based on the borrower’s condition.
The Bank of America settlement is a good reminder that lending discrimination issues can arise in ways that are not always obvious.