Fair Lending is always a hot topic. This is especially true when there are regulatory changes and lenders are scrambling to decipher the unintended consequences and Fair Lending challenges.
Earlier this month we tackled the topic in our webinar Fair Lending & Covid-19: Strategies for Maintaining Fair Lending Compliance.
Now, in this two-part series we’ll address some of the most common Fair Lending questions.
1. What do you think exams will look like this year?
As with any Fair Lending exam, it’s your job to know more than anyone (regulators, examiners, auditors, Special Interest groups etc.) about what your data is saying. You should be prepared to know what it said pre-pandemic, during the pandemic, and post-pandemic. It’s important to be proactive, understand your FI’s actions and decision-making, and be prepared to address any potential disparities.
Make sure you’re regularly analyzing your Fair Lending data to understand and address trends.
2. We are a smaller financial institution. What, if anything, should we be doing to stay on top of Fair Lending?
The size of your FI should drive the risk-based process used to understand and implement a good Fair Lending program. Your focus needs to be on your higher-risk lending areas.
For example, many smaller FI’s are involved in 1-4 family or indirect lending. When an FI offers these kinds of products, it’s expected to have a program (including policies, procedures, exception management, data analysis, etc.) that’s robust enough to support that lending strategy. It’s all about having a program that allows for proactive management and to evolve and change with the environment and circumstances.
3. We are over $1 billion in assets. Can we still qualify for Community Reinvestment Act (CRA) CD services for waiving fees, etc.?
The guidance isn’t clear on this. My best advice is to at least put in a process for fee waivers and consistently apply it. You can then submit it to your regulators for CRA credit. The worst outcome is that they say no. At least you made a good faith effort to help your community.
We just don’t know with 100% certainty what will qualify for CRA credit. CRA is also under review so we could see major changes ahead anyway.
4. If an application for a mortgage loan is denied for income reasons (e.g. lost job due to COVID-19) should that data point be preserved for future Fair Lending reporting?
Unfortunately, there were a lot of mortgage applications in process when the pandemic hit, and a lot of people lost their jobs. It’s heartbreaking, but we still have to use prudent underwriting practices when making a loan.
Fall back on Reg B and action taken requirements. When following prudent lending practices, you still have to be able to prove the borrower can pay the loan back. If a borrower lost their job, you don’t know when they are going to get a new one or what their income will be. Have a consistent standard and stick with it. Reg B has specific requirements for when you need to provide an action. You have 30 days to make a decision.
5. From a Fair Lending perspective, what should we do about forbearance requests on an existing mortgage loan?
Anytime you’re dealing with Fair Lending, you need to be sure you’re consistently applying processes so that similarly situated individuals are treated the same. If you’re going to support forbearance on an existing loan, decide how you’ll respond based on different factors.
Payment status. Is the borrower behind on payments or reaching out proactively before missing a payment? You may want to treat borrowers based on the situation. Make sure you have documented processes in place for the situation and consistently apply them.
If the borrower is behind, when were they late? When it comes to late payments and accommodations, the CARES Act drew a line in the sand between late payments before January 31 and those after.
Borrowers who were given an accommodation related to COVID-19 can’t be reported as delinquent even if the borrower has missed a payment since agreeing to the accommodation. (The key exception is borrowers who were already reported as delinquent before an accommodation was granted. Those borrowers may still be reported as delinquent.)
If the borrower was late before January 31, you might want to follow the standards in place at that time. If the borrower was late after January 31, you’ll have to make sure all applicable rules are followed. This may be tricky since the CARES Act was retroactive and different rules may have been in place when the borrower was first late.
6. What should we do about forbearance requests on a request for a refi?
These are some of those gray areas again where it's process-driven. Be consistent and have a written process in place that you're following. Look to the basic requirements in Reg B (i.e. timing, similar situated).
7. What if you have two similar customer situations where one customer is asking for less help than another. (Ex: One customer requests a one-month extension and another similar customer gets a two-month extension by request.) Is this acceptable as long as we document the situation?
You should document what exactly your FI said and what it offered. A key point in this question is that the borrower made a request. Your FI did not make the offer. The big question is what to do if the one-month borrower comes back and requests another one-month extension.
These are things you need to work through in your policies and procedures. Documentation is going to be key to showing what you did and why you did it.