Lending is the lifeblood of every financial institution, but it does not come without risk—and those risks go far beyond delinquency rates and nonperformance. Your financial institution is expected to comply with many regulations, especially when it comes to fair lending.
The good news is that banks, credit unions, mortgage companies, fintechs, and other financial services companies with strong complaint management systems are in a good position to uncover potential fair lending risks before examiners or special interest groups do.
Read on to learn how consumer complaint management can help you:
- Evaluate Inherent Lending Compliance Risk
- Ensure Lending Compliance Control Effectiveness
- Prevent Serious Consumer Harm
Evaluate Inherent Lending Compliance Risk
Lending presents a variety of fair lending and compliance risks including redlining risk, marketing risk, steering risk, underwriting risk, pricing risk, and servicing risk. There is also the risk of non-compliance caused by weaknesses in your compliance management system (CMS).
Think you know just how risky—or reasonably safe—a lending activity is? It’s a question that comes down to inherent risk, or the level of risk an institution would face if it had no mitigating controls.
Inherent is calculated with a simple formula: Inherent risk = Impact of an event * Probability
While it is not hard to gauge the potential impact of an event, probability is trickier. Your FI could guestimate the probability, or it can look for data. Examples include academic studies, media reports, and trends pieces, and the FI’s past experience.
Complaints are another great source of data. When your FI receives and records a complaint, it is gaining valuable insights that can help uncover non-compliance—whether it’s an outside regulation or an internal policy. Complaints provide an opportunity to help you know that there is an issue, and that can help you more accurately assess probability and inherent risk.
For example, if nothing has changed in your underwriting department or the regulatory environment, and you find an increasing number of complaints related to loan denials, you may need to reevaluate underwriting risk.
Ensure Lending Compliance Control Effectiveness
Every financial institution has policies, procedures, training, systems, and other controls to mitigate lending compliance risk. The goal of these controls is to guard against known risks.
Controls are only valuable if they are effective, and the only way to know if controls are effective is to regularly assess them and measure their effectiveness. A strong complaint program is one piece of data that helps uncover ineffective controls.
For instance, if you notice an increase in complaints about servicing, it is a sign that you may want to review your policies and procedures. Are they effective? Are they being followed? Do you have a third-party vendor handling servicing and doing a poor job? What controls are needed to ensure the vendor is compliant?
The complaints can also trigger an analysis of your servicing risk. You may want to conduct a fair lending analysis to determine whether similarly situated individuals are being treated consistently and if there are any disparities in loss mitigation servicing options, decision processing times and collections processes.
Prevent Serious Consumer Harm
When it comes to violations that cause serious consumer harm, the consequences increase with the number of violations. Regulators believe one violation is one too many. More than one can be a sign of a troubling pattern—one that you were expected to detect and promptly resolve.
Collecting, analyzing, and trending complaints can help you identify these problems. When your FI has a proactive complaint management program, it ensures that complaints are identified, recorded, and resolved, thus giving you a chance to assess potential problems.
For instance, if you see a pattern of complaints suggesting that loan applicants from a protected class received better loan terms at another financial institution, it will give you an opportunity to analyze your data and look for evidence of rate spread and disparities in the pricing charged. Maybe there is a sound reason for the discrepancy, but maybe there is not. You need to find out.
If you find a consistent pattern of discriminatory pricing, it gives you an opportunity to correct the problem before even more consumers are harmed—and before examiners find the problem and question why you didn’t notice it or do anything to protect consumers. This can help reduce legal liability and the likelihood of heightened penalties. It is always better to self-identify and remediate problems on your own than be surprised by examiners.
Is your complaint management program aiding your lending compliance efforts? Download our whitepaper Why Complaint Management Matters and How To Get It Right to find out how you can develop an effective complaint management program.