Today’s challenging financial environment, characterized by high interest rates and historically low housing availability, proves particularly difficult for residential mortgage lenders, especially non-bank lenders. The conditions might push such institutions to consider strategic transactions in order to raise capital, seek out strategic buyers, or acquire struggling competitors. When considering such opportunities, lenders must be mindful of the increased scrutiny surrounding fair lending. Evaluations of risk profiles for both the target and the combined institution are crucial to minimize post-transaction compliance issues.
The Biden administration asserts that the federal government plays an integral role in addressing and redressing past discriminatory practices while ensuring the enforcement of Federal civil rights and fair housing laws. More information on the administration’s position here.
Federal agencies that are responsible for enforcing fair lending have pursued this policy directive aggressively. The Department of Justice, for instance, enforces federal fair lending laws to secure equal access to credit. Non-bank institutions face heightened fair lending risks in numerous areas. A notable development was in 2021, when Attorney General Merrick Garland mobilized a DOJ initiative in partnership with the Consumer Financial Protection Bureau and other agencies to combat redlining, a practice that limits credit availability in minority communities. Learn more about this initiative here.
Following this progressive move, mortgage lenders were informed that they must effectively manage and monitor redlining risks to ensure that credit resources are readily available in both minority and non-minority communities. Heightened risks also extend to property valuations – in 2021, the Biden administration set up a task force aimed at addressing biases in home valuations. More information on this task force here.
Considering the current economic climate and its opportunities for merger and acquisition within the mortgage lending sector, it is crucial for lenders to take an proactive stance in assessing fair lending risks. Potential buyers of mortgage lenders should prepare for increased risks related to fair lending in the post-transaction phase. Evaluations of the target lender’s mechanism for managing compliance within fair lending can be instrumental in identifying potential weaknesses and enable preparation of an action plan before the transaction takes place. The case of Connolly v. Lanham serves to underline the complexities of this area of law.
By being thoughtful about fair lending and careful during due diligence, the risks facing lenders in the current challenging environment can be significantly mitigated – paving the way for strategic investments, opportunistic purchases and well-timed exits.
Author information: Olivia Kelman, a partner and practice group coordinator in K&L Gates’ Miami office, specializes in fair and responsible lending and servicing. Robert Tammero Jr. is a partner at K&L Gates’ Boston office and focuses on the financial services industry.
For the complete Bloomberg Law article, please follow the link here.