Fort Davis State Bank: Elements of a Small Bank Monitoring Program
Recently Fort Davis State Bank (FDSB) of Fort Davis, Texas a $78 million three branch institution signed a consent decree with the Department of Justice. The DOJ complaint, based on an FDIC referral, alleged that FDSB charged Hispanic borrowers more for unsecured loans than it did non-Hispanic borrowers. This consent order is instructive from several perspectives. First, it demonstrates DOJ and the FDIC continued concerned about discrimination at smaller financial institutions. Secondly, the provisions of the consent order suggest elements of a small bank fair lending program. Often compliance officers at smaller institutions ask “What are the elements of a fair lending program?” This settlement provides some, but not all, of the answers. Lastly, there is no new news here. Regulators continue their focus on their non-discriminatory fair lending agenda at financial institutions of all sizes.
Fort Davis, according to the regulators, had problems because: (1) they allowed loan officers (LOs) discretion in setting rates on unsecured loans, (2) the LOs were not properly trained to set loan rates in a non-discriminatory manner and (3) there was no monitoring of loan officer performance to ensure adherence with fair lending laws.
Fair Lending Program Suggestions
Some elements of a fair lending program suggested by the Fort Davis consent order are:
- Uniform pricing policies and procedures including “standards for collecting applications, current financial documents and credit reports for all borrowers, standards for maintaining loan files and uniform pricing matrices.” Do you have unsecured loan pricing policies and procedures?
- Some other suggested elements for your policies and procedures are: limits on how much interest rates can vary either up or down vs. the rate sheet interest rate, factors LOs can consider in allowing for the deviation from the rate sheet rate, written documentation as to why a rate differs from the rate sheet rate, and written notice to the consumer that the rate may be negotiable.
- Additionally, you should monitor your loan officers by prohibited basis group to ensure adherence to your pricing policies.
- Where pricing disparities exist, you should determine why the disparities exist and implement corrective action such as financial remediation, modification of policies and procedures, education, discipline and termination of employees.
- Lastly, DOJ required FDSB to perform annual ECOA training for employees who participate in the origination of loans as well as the establishment of a complaint program covering complaints alleging discrimination in the origination of loans.
If you have questions or comments concerning the Fort Davis State Bank consent order. Please give me a call to discuss.