A Guide to the CFPB's 2015 Fair Lending Report

The Consumer Financial Protection Bureau (CFPB) recently released their 2015 fair lending report. Here's a guide to the key highlights, and how to mitigate your compliance risk.

The CFPB's Office of Fair Lending and Equal Opportunity (Office of Fair Lending) was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. They work to enhance fair, equitable, and nondiscriminatory access to credit for all consumers.

The Office of Fair Lending is responsible for providing oversight and enforcement of Federal fair lending laws; coordinating the Bureau’s fair lending efforts with Federal agencies and State regulators; working with various groups to promote fair lending compliance and education; and issuing an annual report of their activities.

This is the third annual report issued by the CFPB’s Office of Fair Lending. The 2015 report identified the Bureau's Supervision and Enforcement Priorities, including mortgage lending, indirect auto lending, credit cards, and other product areas.

4 Key Highlights from the CFPB's Annual Fair Lending Report

Fair lending is a compliance area that requires active management (like spinning plates). We've tried to alleviate some of your compliance stress by gathering highlights from this report, and sharing our guidance on how to mitigate the risks. Here are four of the key highlights:

1. Risk-Based Prioritization

The Bureau uses risk-based prioritization that assesses how best to address fair lending risk in the entities, products and markets. This risk-based prioritization considers the following five qualitative and quantitative factors that include:

• Complaints and Tips from Consumers, Advocacy Groups, Whistleblowers, and Government Agencies
• Supervisory and Enforcement History
• Quality of Lenders’ Compliance Management System
  
  • “The lower the quality of an institution’s fair lending compliance management system, the higher the institution’s fair lending risk to consumers.” 
  • Read More: 4 Fair Lending Exam Triggers & Compliance Best Practices
    
• Data Analysis
• Market Insights
• Read More: Are You On the Regulators' Fair Lending Radar? 5 Factors to Assess

2. Supervision

Supervisory activities range from assessments of fair lending compliance management systems to in-depth reviews of products or activities that may pose heightened fair lending risks to consumers. 

The Bureau continues to conduct three types of fair lending reviews: ECOA Baseline Reviews, ECOA Targeted Reviews, and HMDA Reviews. They also created the National Fair Lending Examination Team (FLET) in August 2014 to increase fair lending knowledge, specialization, and examiner tools. 

Some particular areas of focus mentioned in the report are:

• Exceptions: Document exceptions to credit standards 
  • Read More: 5 Elements of Exceptions Policies Needed for Fair Lending Compliance
    
• Indirect Automobile Lending: “One way for mitigating fair lending risk associated with indirect auto lending policies is to monitor and, if necessary, correct disparities." ECOA Targeted Reviews include examination of three areas:
  • Credit Approvals and Denials,
  • Interest Rates by the Lender to the Dealer (Buy Rates), and
  • Any Discretionary Mark-Up or Adjustments to Buy Rates.
  • Read More: Auto Lending's Dangerous Trio of Fair Lending Risk Factors
• HMDA Submission: While some firms have strong policies/procedures for HMDA data collection and reporting, CFPB examination teams also found inadequate compliance management systems and severely compromised mortgage lending data.  HMDA data integrity reviews will continue. 
  • Click Here for CFPB’s HMDA Resubmission Guidelines

3. Monitoring of Compliance with Supervisory Resolutions

“After an examination reveals discrimination on a prohibited basis, we have directed institutions to address the aspects of their businesses that give rise to the discrimination and to adopt policies and practices that effectively monitor and mitigate the potential for future discrimination," according to the report. "While the Bureau’s supervisory actions are critical to address discriminatory practices, the importance of institutions effectively self-monitoring for fair lending risk cannot be underestimated.” 

When follow-up exams identify repeat violations, the Bureau will consider whether to take enforcement actions. Supervisory resolutions include:

• Improving Business Practices: The CFPB specifically mentions exception guidelines, limiting discretion, third-party management.
• Enhancing Compliance Management: A well-developed fair lending compliance system includes: 
  • Policies and Procedures to Address Fair Lending Risks
  • Effective Monitoring (includes regular analysis of loan data for potential prohibited disparities)
  • Prompt and corrective actions to identified risks and violations
  • Regular training for employees, officers, and Board
  • Policies and Procedures for Complaint Management
  • Robust Audit Function
  • Meaningful Board Management Oversight
  • Read More: 4 Important Elements of a Succesful Compliance Management System

4. Common Violations from ECOA Examinations

The Bureau also noted some of the most common ECOA violations:

• Discrimination on a prohibited basis in a credit transaction
• Borrower information collection
  • Improperly requesting information about race, color, national origin, sex, marital status or source of income
  • Failure to request and collect information on mortgage loans
• Improperly requiring the signature on an applicant’s spouse
• Failure to notify applicant of a denial in a timely basis, or failure to provide sufficient information for the reason behind the adverse action.
• Read More: 7 Reg B Violations: Compare Your Fair Lending Compliance Program

Other Notable Updates

• HMDA Plus Update: In addition to new data elements for HMDA (credit score, total points and fees, property value, etc.), the Bureau is exploring ways to streamline HMDA data collection and reporting. There is no indication of when the proposal may be finalized.
• Small Business Data Collection: Future small business lending reviews will help and enhance the CFPB’s knowledge in this area. This requirement continues to appear far on in the distance.
• Proxy Methodology: The assignment of proxies for race, gender and ethnicity to loan data has been one of the more passionately discussed topics in recent years. TheCFPB continues to support the use of race and ethnicity proxies by looking at the borrower’s last name and place of residence.  However, the Bureau does acknowledge the process is not perfect, stating “We expect the methodology will continue to evolve as enhancements are identified that further increase accuracy and performance.
  • CFPB proxy methodology white paper, Summer 2014
• CFPB Bulletin on Social Security: TheCFPB reminds lenders that requiring additional documentation from consumers who receive Social Security disability income may raise fair lending risk. 
  • Read More: Are Your Underwriting Policies Creating Fair Lending Risk?

TRUPOINT Viewpoint:  This is the second government report issued on ECOA/Fair Lending in April (Click Here for the DOJ Report Overview). The major themes between the two reports are strikingly similar:

• Fair Lending supervisory and enforcement activity continues to touch on all primary consumer lending products (Mortgage, Auto, Consumer, Credit Cards).
• Regulators recommend a data-driven approach to evaluate risk.
• Regulation B Violations have to be closely managed (policy, procedure, audit).
• There's an ongoing need to conduct regular risk assessments in order to gauge the institution’s inherent fair lending risk and the associated controls associated with the institution’s compliance management system.

By now, it's clear that simply reviewing the regulations is not enough to maintain compliance. Financial institutions must also look at regulatory guidance, speeches, press releases, supervisory highlights, and annual reports to keep tabs on best practices. Organizations that don't keep up may fall behind.

TRUPOINT Partners helps over 500 financial institutions stay aware of changes in the compliance landscape and successfully manage their fair lending risk.  Regardless of where you are in your fair lending journey, we would love to explore how we can efficiently and effectively help you manage your risk. We can help you keep your plates spinning!