Fair lending requirements have been in place since the inception of the Equal Credit Opportunity Act more than 40 years ago. However, as evidenced by recent enforcement actions, midsized and smaller lending institutions increasingly are coming under scrutiny by both supervisory agencies and community groups for activities that could be characterized as fair lending-related.
While fair lending scrutiny historically has been focused on mortgage lending activities, recent legal and regulatory changes such as the Credit Card Act of 2009 demonstrate an increased need to monitor fair lending risks in other product areas, including credit card and auto lending.1
Not long ago, most lenders were able to satisfy regulator expectations related to fair lending by establishing basic policy standards prohibiting discrimination, training employees regarding these standards and monitoring exceptions to underwriting guidelines. More recently, however, examiners are “raising the bar” significantly in terms of the types of controls they expect institutions to have in place. Notably:
- Institutions of all sizes are facing recommendations or orders to implement (or significantly expand existing) fair lending risk assessment programs. Examiners expect detailed evaluation of the fair lending-related risks and controls applicable to each lending product and each stage of the lending process, including marketing, application, underwriting, pricing, origination and servicing.
- While many larger consumer lenders have had statistically based fair lending monitoring programs in place for some time, more examiners are suggesting that smaller institutions implement these types of programs, as well. Even institutions that already perform statistical monitoring are facing pressure to expand the scope and depth of their programs.
Challenges and Opportunities
In our experience, lenders face significant challenges in enhancing their fair lending programs to satisfy heightened regulatory expectations. These challenges include:
- Dealing with the lack of race, gender, ethnicity and other protected class data for lending products outside of the residential real estate market – Although the use of “proxies” for this information (e.g., based on census or surname information) is increasing, these methods can create unique risks that must be managed carefully.
- Determining whether and/or how fair lending-related monitoring activities should be communicated – This includes communications within the organization and to outside parties such as regulatory agencies.
- Appropriately interpreting and translating arcane statistical results into clear, valid conclusions – The focus should be on how the institution’s actual lending practices are affecting its fair lending risk profile.
- Establishing risk assessment programs that are sufficiently comprehensive and well-documented – Key goals include satisfying examiner expectations and using the results to drive other aspects of the organization’s fair lending risk management program.
Lenders that are able to overcome these challenges can gain key competitive advantages, including:
- Reducing the risk of regulatory criticism, civil money penalties, litigation and reputation damage;
- Gaining the potential to offer or structure lending products in unique ways that competitors without robust fair lending controls cannot; and
- Using with confidence the institution’s record of fair and responsible lending as a marketing and public relations tool.
Our Point of View
Institutions should take the following steps in order to mitigate fair lending risks successfully:
- Establish detailed fair lending risk assessment processes, which includes integration into fair lending programs.
- Ensure all appropriate lending products and process stages are incorporated within the fair lending program.
- Build robust monitoring programs and ensure personnel with the right skill sets to interpret monitoring results are engaged in the process.
- Ensure all fair lending program components are reviewed regularly to account for changes in the institution’s business model, regulatory changes and other risks.
How We Help Companies Succeed
Our Risk & Compliance Solution employs innovative methodologies and tools to evaluate the fair lending programs and practices of financial institutions. Our professionals have deep experience in the following areas:
- Designing, building and supporting the implementation of risk assessment frameworks • Implementing or enhancing fair lending monitoring and testing
- Using our proprietary statistical monitoring tools, customized to each institution’s needs, to detect and investigate significant trends or patterns in an institution’s lending data
- Reviewing and enhancing processes and controls designed to ensure the accurate collection and maintenance of fair lending-related data
- Creating and providing fair lending training and awareness materials
- Conducting or providing subject-matter specialist support for fair lending audits
- Developing, implementing and managing comprehensive plans to respond to and resolve fair lending-related enforcement actions
Our proven tools and methodologies allow our clients to assess and mitigate their fair lending risks effectively and in less time than would be required to develop these solutions internally. Our deep experience providing fair lending services to organizations of all types and sizes ensures our clients have access to the latest insights regarding leading industry practices and regulatory agency expectations.
A large financial services organization with multiple consumer and commercial lending units recently engaged us to enhance the effectiveness of its fair lending compliance audit program. In doing so, we:
- Developed a process to identify and document relevant information about the institution’s lending products, customer base, geographies and other key factors.
- Developed and implemented a fair lending audit risk assessment methodology and scorecard.
- Identified detailed fair lending risks and expected controls for each of the client’s lines of business, organized according to the FFIEC’s fair lending risk factors.
- Provided subject-matter expertise to the client in scoping, executing and presenting the results of the audit to process owners and the audit committee.