Chapter 25 — Exercises

Fair Lending: ECOA, HMDA, Redlining, Disparate Impact, and the Appraisal Gap

Work these with the chapter closed where you can. Items marked † have worked solutions in the answers appendix. Nothing in this file is legal advice; several items ask you to state what you would verify and with whom, and "I would confirm this with compliance before acting" is frequently part of a correct answer.

A. Recall and precision

25.1 † List, from memory, all nine prohibited bases under ECOA. Then list all seven under the Fair Housing Act. Circle the five that appear on both.

25.2 Which four prohibited bases appear under ECOA but not under the Fair Housing Act? Which two appear under the Fair Housing Act but not under ECOA?

25.3 State the qualifier that attaches to age as an ECOA prohibited basis, and explain in one sentence why that qualifier exists.

25.4 † Sort each of the following as ECOA only, Fair Housing Act only, or both: (a) national origin · (b) familial status · (c) marital status · (d) receipt of Supplemental Security Income · (e) disability · (f) religion · (g) having filed a complaint with the CFPB about a prior loan · (h) color · (i) being pregnant · (j) sex.

25.5 What are the three statutory purposes of the Home Mortgage Disclosure Act? Which one explains why you collect demographic information you are forbidden to use?

25.6 Name the three permissible marital-status categories under Regulation B where the question is allowed at all. Name three commonly used categories that are not permissible.

25.7 † State the Regulation B notification deadline for each of the following: (a) a completed application that is denied; (b) an incomplete application you intend to keep alive; (c) a counteroffer the applicant never responds to.

25.8 What is the difference between an adverse action notice and a notice of incompleteness? Name one thing that is true of both.

25.9 Define reasonably expected market area in one sentence, and explain why a lender cannot shrink its REMA by choosing not to serve part of a metropolitan area.

25.10 Name five data points on the HMDA loan application register that describe pricing.

B. Classification: disparate treatment or disparate impact?

For each, state which doctrine is primarily in play, what evidence would establish it, and what the lender's best defense would be. Some are neither; say so and explain.

25.11 † A lender will not originate first mortgages below \$85,000, citing fixed origination costs. In its market, the housing stock below \$85,000 is concentrated in three census tracts, all majority-minority.

25.12 A loan officer grants a documented underwriting exception to an applicant with 6.2 months of reserves and declines to seek one for a second applicant with 6.4 months of reserves and an otherwise identical file. The two applicants differ on a prohibited basis. No exception log entry exists for either.

25.13 † A lender requires two years of continuous employment with the same employer for all borrowers, where the agency guideline permits a two-year work history across employers.

25.14 A branch manager tells a new loan officer, "Don't waste your time on the north side, those deals never close."

25.15 A lender's automated marketing platform excludes households with estimated incomes under \$60,000 from a direct-mail campaign for a first-time-buyer product.

25.16 † A lender charges every applicant the same origination percentage but permits loan officers to waive it at their discretion. Waivers are granted at materially different rates across prohibited-basis groups. Every waiver is logged, but none of the log entries states a reason.

25.17 A loan officer declines to accept applications on properties older than sixty years, because a prior file had a repair-condition problem.

25.18 An underwriter denies an application because the borrower's documented income does not support the payment. The applicant is a member of a prohibited-basis group. Nothing else distinguishes the file from any approved file.

C. Applied reasoning

25.19 An applicant tells you their income includes \$1,180 a month in Social Security disability benefits. Write down (a) the two questions you may ask about that income, (b) two questions you may not ask, and (c) the underwriting question you must still answer about it that has nothing to do with fair lending.

25.20 † A married applicant qualifies individually under your lender's written standards. The processor emails you: "We should just add the spouse, it'll look cleaner." Write your two-sentence reply, and name the one circumstance in which a spouse's signature may still be required and on which document.

25.21 An applicant asks, "If I put down that I'm Hispanic, does that hurt my application?" Write your answer in fewer than sixty words. Then write what you do if they decline to answer and you are sitting across a desk from them.

25.22 You take an application by telephone and the applicant declines to provide ethnicity, race, and sex. State what you record, and how it differs from the face-to-face case.

25.23 † Your lender operates a special purpose credit program offering a \$5,000 closing-cost credit to applicants purchasing in specified census tracts. You have two applications open. One is eligible under the written plan; the other is not, but has a much harder file and would benefit more. State what you do with each, and why the sympathetic case does not change the answer.

25.24 Rewrite each of these adverse action reasons so it would satisfy Regulation B's specificity requirement, or state that it cannot be fixed and why: (a) "Application did not meet our lending criteria." (b) "Insufficient credit score." (c) "Automated decision." (d) "Value of collateral insufficient."

25.25 A borrower emails you: "The appraisal came back \$22,000 under contract and I think it's because of who lives in my neighborhood." Write the reply. Separate the two issues, name both channels, and do not promise an outcome.

D. Calculation and the file

25.26 † The Linden Street file closed at \$365,750 with an origination charge of \$3,657.50 and 0.500 of a discount point costing \$1,828.75. (a) Compute the total origination charges as a percentage of the loan amount. (b) State which HMDA fields carry each of those two figures. (c) Explain why a pricing disparity analysis can proceed from the register without anyone opening a file.

25.27 The Linden Street borrowers' qualifying income is \$10,500.00 a month. What figure is reported in the HMDA income field, and in what units?

25.28 † On day 44 the Linden Street back-end ratio moved from 42.66% to 48.48% when a \$611.00 monthly obligation appeared. (a) Verify both ratios from the underlying dollars. (b) State the principal reason that would have been correct on an adverse action notice, and the one that would have been wrong. (c) State what the register's action-taken code would have been under three scenarios: the file closes; the file is denied; the loan officer stops returning calls.

25.29 The Harlow Street file: \$4,150.00 gross monthly income, \$395.00 in monthly debts, PITI + MIP of \$1,721.57. (a) Verify the 41.48% front-end and 51.00% back-end ratios. (b) Compute the back-end ratio if a \$95.00 monthly obligation were retired. (c) Compute the gross monthly income that would be required to reach a 43% back-end ratio at the current payment and debts.

25.30 † The county down-payment assistance second on the Harlow Street file is \$10,000, forgivable at 20% per year over five years, and the FHA minimum required investment is 3.5% of the \$215,000 purchase price. (a) Compute the minimum required investment. (b) Compute what remains of the \$10,000 after it is applied. (c) Write the one-sentence rule about which applicants hear about this program.

E. Documents and drafting

25.31 † Draft an adverse action notice. Using a constructed file — a \$248,000 conventional purchase, 5% down, 691 representative score, denied because the back-end ratio computes to 53.9% against a program maximum of 50% — draft the complete notice. It must contain: the statement of action taken; the specific principal reason; the full ECOA notice paragraph; the required FCRA elements; and the appraisal-copy statement. Then write, below the notice, a one-paragraph memo to your file recording what you attempted before denying.

25.32 Draft a notice of incompleteness for an application missing two months of bank statements and a written explanation of a 2023 credit inquiry. It must specify what is needed, set a reasonable deadline, and state the consequence of not responding.

25.33 † Write the loan origination system note you would enter on day 44 of the Linden Street file, in five sentences or fewer, such that a stranger reading it in six years could reconstruct what you did and why. Then write the note a careless loan officer would enter, and mark the three specific things the careless version cannot prove.

25.34 Take the register record in Figure 25.2 and write, in plain English, the three-sentence summary a fair-housing researcher would produce from that row alone — then write the three most important things about the file they could not possibly know.

F. Judgment

These have no clean answers. Write your reasoning, name what you would verify, and say who you would ask.

25.35 † It is 4:10 on a Friday. Two files need work before Monday. File A is a referral from an agent who has sent you eleven closings; the borrower needs one letter of explanation. File B is a walk-in with a 632 score, an unusual income structure, and no agent behind them; the borrower needs two hours of restructuring and a call to the underwriter. You have ninety minutes. What do you do, and what makes your answer defensible eighteen months later? Note carefully: "work the referral first because relationships matter" is a real business argument. Engage with it rather than dismissing it, and then say what has to be true about the rest of your pipeline for that argument to hold.

25.36 Your book of business comes almost entirely from four real estate agents. Their clientele is demographically homogeneous. You have never declined anyone unfairly and you can prove it. Describe the fair-lending exposure this creates, why it is not solved by your clean underwriting record, and three concrete things you could do about it that do not involve dropping any of the four agents.

25.37 † A borrower tells you a previous lender "made them feel like they weren't wanted" and did not return calls, and that they never got any letter. State (a) what violations that description would suggest if accurate, (b) why you cannot conclude anything from a borrower's account alone, and (c) what you tell the borrower about their options without characterizing the other lender's conduct.

25.38 Your branch manager proposes a contest: the loan officer with the highest pull-through rate this quarter wins a bonus. Identify the fair-lending risk the incentive creates, and propose a modification that preserves the business goal.

25.39 You realize, running your own quarterly audit, that eleven of your last fifty applications were withdrawn or closed for incompleteness, and that nine of the eleven came from one referral channel. What do you do first, second, and third — and which of those steps do you not take on your own?

25.40 † The Loan File extension. Using the Linden Street register record and the fifty-one-day calendar, identify a fourth point in the transaction — not one of the three named in the chapter — at which a fair-lending violation could have occurred. Name the day, name the conduct, name the statute or regulation, and name the single document that would have prevented or disproved it. Then state, honestly, whether that fourth point is a realistic risk or a theoretical one, and defend your answer.