6 core areas your fair lending risk assessment should cover

Regulatory scrutiny of fair lending is heating up. Last fall the CFPB issued a semi-annual report outlining areas that indicate heightened fair lending risk. While there haven’t yet been any major penalties assessed to credit unions in the area of fair lending, the regulatory agencies want financial institutions, including credit unions, to be proactive about ensuring they are in compliance with the fair lending requirements. That’s why performing a fair lending risk assessment to see if there are any red flags makes much more financial sense than conducting a full-blown fair lending audit.

What should be included in your credit union’s fair lending risk assessment to avoid sending up a flare to your regulator in its search for fair lending violations? Here are six areas you don’t want to miss.

Fair Lending Risk Assessments

1. Environment: Including Supervisory Matters

Review your position relative to external factors. Such factors may include your regulator, your member base, and so on. Also review data such as prior examination reports and external sources.

One good resource that is available for this area is the Office of the Comptroller of the Currency, which provided several checklists for compliance in its full text of the rule. The checklist applicable to this section includes the following.

For self-tests under ECOA that involved the collection of applicant personal characteristics, did the [financial institution]:

  1. Develop a written plan that describes or identifies the:
  • Specific purpose of the self-test?
  • Methodology to be used?
  • Geographic area(s) to be covered?
  • Type(s) of credit transactions to be reviewed?
  • Entity that will conduct the test and analyze the data?
  • Timing of the test, including start and end dates or the duration of the self-test?
  • Other related self-test data that is not privileged?
  1. Disclose at the time applicant characteristic information is requested, that:
  • The applicant will not be required to provide the information?
  • The creditor is requesting the information to monitor its compliance with ECOA?
  • Federal law prohibits the creditor from discriminating on the basis of this information or on the basis of an applicant’s decision not to furnish the information?
  • If applicable, certain information will be collected based on visual observation or surname if not provided by the applicant?

2. Retail Presence And Marketing Strategy

Don’t overlook your presence and marketing strategies when assessing fair lending risk. Relevant areas include deposit and lending strategies, growth patterns, how the credit union approaches its market/membership segment, etc.

Make sure your marketing materials do not

  • State racial or ethnic limitations;
  • Use words or photos that convey racial or ethnic limitations or preferences;
  • Place advertisements that a reasonable person would regard as indicating specific prohibited basis group consumers are less desirable;
  • Advertise only in media serving areas of the market that are comprised of a particular racial or ethnic group;
  • Conduct other forms of marketing differently in areas of particular racial or national origin group characteristics of the market;
  • Market through brokers known to serve only one racial or ethnic group in the market;
  • Use a prohibited basis in any pre-screened solicitation for residential credit; or
  • Provide financial incentives for loan officers to place applicants in nontraditional products or higher-risk products.

3. Credit Administration

The next section in your fair lending risk assessment should focus on the credit union’s policies and approach to lending, with emphasis on credit decisioning, pricing, and applicant notifications.

Some questions to ask include:

  • Are underwriting practices clear, objective, and generally consistent with industry standards?
  • Is pricing within reasonably confined ranges with guidance linking variations to risk and/or cost factors?
  • Does management monitor the nature and frequency of any exceptions to its standards?
  • Are denial reasons accurately and promptly communicated to unapproved applicants?
  • Are there clear and objective standards for referring applicants to (i) subsidiaries, affiliates, or other lending channels within the bank, (ii) classifying applicants as “prime” or “subprime” borrowers, or (iii) deciding what kinds of alternative loan products should be offered or recommended to applicants?
  • Are loan officers required to document any deviation from the rate sheet?
  • Does management monitor consumer complaints alleging discrimination in loan pricing or underwriting?

4. Exception Management

Evaluate the credit union’s exceptions in decisioning, pricing and the setting of loan terms. Analyze the tracking of exceptions, the review of exceptions, and the impact on fair lending for both direct and indirect lending channels.

5. Role Of Third Parties In The Lending Process

To the extent applicable, credit unions should identify all third parties involved directly or indirectly in the lending cycle from marketing to servicing and collections. They should further perform an analysis of the risk associated with those third parties through direct activities on behalf of the financial institution or through the third party’s own activities that may impact the financial institution’s fair lending performance.

6. Technical Compliance

Review the technical requirements associated with fair lending—including a sampling of your credit union’s HMDA submission accuracy, fair lending-related disclosures, and an analysis of the handling of non-funded applications.

Fair Lending Flubs

In its report last fall, the CFPB called out a pattern of factors that, time and time again, indicate a heightened fair lending risk. If the CFPB identifies these weaknesses in a bank or credit union, chances are they’ll come knocking. Here are a few warning signs of increased fair lending risk:

  • Weak or nonexistent fair lending compliance management systems
  • Underwriting and pricing policies that consider prohibited bases in a manner that violates ECOA or presents a fair lending risk
  • Discretionary policies without sufficient controls or monitoring to prevent discrimination
  • Inaccurate HMDA data
  • Noncompliance with Reg. B’s adverse action notification requirements

For more information regarding Fair Lending and how to best conduct a Fair Lending risk assessment, please contact Jane Pannier at AffirmX, jane.pannier@affirmx.com.

Jane Pannier

Jane Pannier

Jane Pannier is Senior Vice President and in-house counsel for AffirmX LLC, a developer of an innovative remote compliance review solution. Ms. Pannier is also SVP of AdvisX, a CUSO ... Web: www.affirmx.com Details