Regulatory Possibility

“The rule is, jam tomorrow and jam yesterday—but never jam today.” ―Lewis Carroll, “Alice’s Adventure in Wonderland”

Did you hear about the Maryland community bank recently accused of discriminating against white males? The bank was given a fair lending violation for creating a loan program designed to help minorities and women obtain more affordable credit.

I’m not kidding. The absurdity of the bank’s Alice in Wonderland predicament might prompt a few chuckles—except it illustrates a deadly serious problem associated with excessive regulatory burden.

ICBA has always championed common-sense regulation for community banks. Regulations must be fair, balanced and relevant to a bank’s scale and real-world risks and activities—but they must also be possible to achieve. Citing compliance achievability as a standard might sound flippant, but I’m serious. It’s vitally important, and becoming increasingly so.

The direction of today’s fair lending enforcement in pursuit of a “disparate impact” legal theory represents the most troubling case in point.

Several years ago the Department of Housing and Urban Development began using disparate impact, a legal premise not yet affirmed by the court system. By examining statistical patterns in lenders’ loan portfolios, disparate impact attempts to determine whether lenders might be discriminating against borrowers. Under this controversial approach, HUD has given itself extra leeway to initiate damaging fair lending investigations, even against lenders with credit practices that are specifically developed not to discriminate against anyone.

In short, HUD is looking to fix problems that don’t exist, and that’s dangerous. The potential for mischief and harm is too great. ICBA has spoken out against disparate impact and has met with top Justice Department officials and other policymakers about our concerns.

ICBA and every community banker strongly support the principles of fair lending. No community bank wants to turn away any worthy and viable loan, to anyone. But community banks must operate in the real world. When regulatory rules, directives or actions create confusion or conflicts, and when mandates become impractical or impossible to implement, regulatory burden becomes paralyzing. And that’s extremely destructive.

So when the Consumer Financial Protection Bureau issued new “qualified mortgage” lending standards earlier this year and then recently endorsed the use of disparate impact, this regulatory paradox became a pressing matter. Currently, a lender that decides to issue only qualified mortgages to avoid new legal and litigation risks created by the CFPB rules could trigger a fair lending violation. Conversely, working to avoid a fair lending violation by issuing non-qualified mortgages could expose a bank to unacceptable reputational damage and lender liability.

Without formal clarification and assurances from the CFPB and HUD, community banks and other mortgage lenders face a serious, no-win regulatory double bind. So last month ICBA joined several other trade groups to ask HUD and the CFPB to provide guidance to resolve the conflict and uncertainty. Otherwise mortgage lending could fast become an unworkable mess throughout the country, for both lenders and borrowers.

As the industry’s champion of proportionally tiered regulation for community banks, ICBA believes regulations should be clear and balanced, but also possible to achieve. Yes, this is obviously common sense (as rare as hen’s teeth in Washington these days). But eradicating this new and even more dangerous form of regulatory burden is not only necessary for already overburdened community banks; it’s imperative to maintain the full and proper functioning of Main Street America’s economy. Nothing less is acceptable.

Reach Camden R. Fine at