Lenders are focused on bringing in and closing loans, but that’s not where their responsibility to a financial institution ends. Lenders also have an important role to play with compliance.
1. What are some foundational fair lending principles that all lending personnel should be aware of?
Fair lending regulations are designed to prevent discrimination in any aspect of the lending process. As a compliance professional, your fair ending compliance management program is all about ensuring that similarly situated individuals are treated similarly, and the potential for discrimination to occur is limited.
Lending personnel should always be aware of:
- Reg B – The Equal Credit Opportunity Act (ECOA). ECOA has been the Fair Lending foundation for all lending activities since the early 1970s. ECOA says lenders can’t discriminate based on race, color, religion, national origin, sex, marital status, or age and adverse action statements must be available. Spouses can’t be forced to sign loan notes if they have no interest in the business.
- Fair Credit Reporting Act (FCRA). A lender needs a borrower’s written permission to run a credit check and has certain obligations in the event of identity theft.
- Home Mortgage Disclosure Act (HMDA). HMDA requires the collection of transaction-specific mortgage factors for mortgage loan applications and originations to help determine if financial institutions are serving the housing needs of the communities they are in, identify possible discriminatory lending patterns and enforce anti-discrimination statutes.
- Community Reinvestment Act (CRA). CRA ensures that banks serve customers throughout the community, including low- and moderate-income neighborhoods. This includes credit unions if CRA is required at the state level.
- Fair Housing. Officially known as Title VIII of the Civil Rights Act of 1968, but commonly known as the Fair Housing Act, this is the backbone of Fair Lending compliance today.
These are the foundational elements of a fair lending program.
2. Who should be ultimately responsible for compliance?
Everyone! Compliance is a team sport. Anyone working in the institution who isn’t aware of compliance could cause a risk.
It starts at the top. Your board of directors needs to set the tone. Everyone at the institution is accountable for compliance—including loan officers and servicers.
Ignorance is not bliss. If you are not compliant or do not understand the importance of compliance, it’s not just a problem for your institution. It can also hurt your career. Compliance violations stay with you forever. They are public records and easily searchable. If your institution is subject to penalties or has a bad reputation, it can prevent you from seeking new opportunities at other institutions.
Don’t be the lending employee responsible for causing major issues.
3. Fair lending is hard to wrap my head around. How can I help my institution prevent fair lending enforcement or litigation?
One of the most helpful things you can do is report complaints.
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 that needs to be corrected.
Everyone needs to follow your institution’s policy for complaint management and properly log complaints—even if you have a verbal conversation and you think that you solved the issue already. With so many places for consumers to complain—everywhere from social media to the Consumer Financial Protection Bureau (CFPB)—your institution needs to know what customers and members are saying and leverage that information to correct deficiencies before they are brought up by an examiner or consumer group.
4. What is another major risk when it comes to lending?
The potential for Unfair, Deceptive or Abusive Acts and Practices (UDAAP) risk is always a consideration—especially when considering the life of the loan from the time of solicitation and application through servicing. Any deviation of treatment, terms, or offerings from fee waivers to loss mitigation can bring UDAAP scrutiny.
This year alone the CFPB has filed eight different actions against servicing companies for deceiving borrowers and mishandling the borrower’s payments. Third parties that handle any mortgage, loan process, or marketing for your institution can also hurt you, your reputation, and your borrowers.
Remember: Neither borrowers nor regulators differentiate between your institution and third-party vendors working on your behalf. They will hold your institution responsible for any harm they cause.
5. How much lending compliance do I really need to know?
You need to know enough about lending compliance to have a good, solid understanding of rules and expectations.
It is not about the citations or being able to regurgitate the law. You need to understand the concepts, the impact, and your own policies and procedures so you can put them into action when working with borrowers. You need to be armed with enough knowledge to understand fair lending and/or UDAAP pitfalls. You should be able to make decisions that put your borrowers’ needs first and align with your institution’s risk tolerance.
Want to learn more? Download our whitepaper 7 Fair Lending Compliance Risks.