Fair Lending compliance is a hot button issue, making it critically important that your institution has a clear sense of its fair lending risk exposure.
From the Office of the Comptroller of the Currency’s (OCC) supervisory priorities and speeches from officials at the National Credit Union Administration (NCUA) to the Consumer Financial Protection Bureau’s (CFPB) advisory on the Equal Credit Opportunity Act (ECOA) and the Justice Department’s fair lending initiative, all eyes are on fair lending.
While Fair Lending compliance can be complex, having a clearer sense of your risk exposure can make it simpler.
Uncovering fair lending risk to build a stronger fair lending program
The first thing to remember is that Fair Lending covers every stage of the crediting process — from marketing all the way to servicing.
Second, Fair Lending applies to all loans — not just HMDA loans.
And third, regardless of whether staff is officially responsible for compliance efforts, they are still responsible for supporting Fair Lending efforts and complying with Fair Lending laws and regulations.
Here are the seven primary Fair Lending risks.
Compliance Management Program Risk
Is your Fair Lending Compliance Management Program (CMP) able to effectively manage and mitigate your Fair Lending risk? The strength of your CMP needs to be commensurate with the inherent risk profile of your institution.
Redlining continues to be a major regulatory hot topic. But do you know your Redlining risk? In today’s regulatory environment, you need to.
Fair Lending extends to marketing. Financial institutions need to ensure they are marketing their services equally to similarly situated individuals. One question to consider as you assess your marketing risk is: Are we receiving applications consistent with our market demographics?
As you assess steering risk, you will be looking to determine if similarly situated individuals are treated similarly. Any evaluation of steering risk will benefit from the insight provided by Fair Lending data analysis. One question to consider: Are we directing certain applicants to particular products? By analyzing your data, you’ll be able to identify any disparities.
Underwriting risk is key area of Fair Lending risk. When analyzing your data, pay attention to the number and rate of originations and denials. As you assess your risk, look for any vague or subjective underwriting criteria or other potential for discretion in the process.
Are all similarly situated applicants receiving similar pricing? If not, you may have pricing risk exposure. As you analyze your data, you’ll be looking for incidence of rate spread, and disparities in the pricing charged.
Consumer complaints are common during servicing, and consumer complaints can trigger regulatory attention. In analyzing your servicing risk, ensure that similarly situated individuals are being treated consistently. You’ll also want to pay attention to any disparities in loss mitigation servicing options, decision processing times, and collections processes. And be advised — even if your bank outsources servicing, you are still responsible for that third party vendor’s Fair Lending compliance.
Fair Lending is a top priority for regulators and regulatory scrutiny of Fair Lending will heighten.
Are you aware of the Fair Lending risk in your financial institution?