Background
The First United Bank of Texas (FUB) is a $1.2 billion FDIC regulated subsidiary of Plains Bancorp operating in western Texas (Dimmitt, TX). The FDIC/DOJ investigations found the Bank charged Hispanic applicants 205 basis points (BPs) more than non-Hispanic applicants for unsecured consumer loans. After performing a regression analysis, the basis point differential between Hispanic and non-Hispanic interest rates for unsecured loans at FUB was still a statistically significant 142 BPs.
Avoid the Problem
FUB is the most recent in a string of mostly smaller financial institutions to be prosecuted by the regulators for pricing issues with unsecured consumer loans. The lessons to be learned from the settlement are not new. And, furthermore, the lessons have three easy fixes.
- Develop price sheets for the loans which typically contain factors such as credit scores, loan amounts and loan terms arranged in a table with interest rates in the cells. Do not give your loan officers broad subjective discretion in setting loan rates.
- Monitor adherence to the rate sheets. That is, check either annually, semi-annually, or quarterly to see that loan officers are not treating prohibited basis group applicants differently from non-prohibited basis group applicants. Depending on the size of your loan portfolio your monitoring can be done with spreadsheets, or a more elaborate analysis may be needed if the number of loans is large enough. If you are wondering what might be best for your institution, call us; we will be happy to provide some guidance depending on your particular situation.
- Train your loan officers and other customer-facing staff in the organization regularly on their fair lending responsibilities. Many organizations train new staff when they join the institution and then annually. There are numerous software options to do this.
It’s Worth the Effort
Talk to anyone who has lived through a regulator issue; the costs are very significant: legal and other fees, senior management and Board time and harm to your institution’s reputation. If you have questions or need assistance, please call (847-295-6881) or email us (rpreiss@preissco.com).
