Just when you think the COVID-19 pandemic can’t make life and work anymore challenging, the Office of the Comptroller of the Currency has reminded us that the ongoing crisis has created an environment of increased Fair Lending risk.
In its Spring 2020 Semiannual Risk Perspective, the OCC notes that overall compliance risk is increasing, calling out Fair Lending risk in particular.
The agency says that the onslaught of CARES Act mandates, including Paycheck Protection Program (PPP) applications, combined with a shift to work-from-home arrangements at many financial institutions have created a perfect storm for Fair Lending risk. This includes Fair Lending compliance responsibilities associated with underwriting, monitoring customer activity, and opening new accounts, and communicating with customers (Fair Banking).
3 Fair Lending Risks
The OCC notes Fair Lending risk caused by:
High volume of lending-related requests. Requests for forbearance, deferrals, or loan modifications along with large numbers of PPP applications mean FIs are responding to huge numbers of consumer and business requests. With the increased volume comes the possibility that requests may not be addressed promptly. Additionally, it increases the likelihood of mistakes or oversights that could lead to Fair Lending violations.
Failure to update policies and procedures to reflect CARES Act mandates. The CARES Act impacts mortgage servicing, including early intervention, borrower contact, loss mitigation, and foreclosures, as well as reporting requirements. In many cases, these changes give FIs increased flexibility but taking advantage of that flexibility requires updating policies and procedures to ensure they are implemented across all departments to avoid disparate treatment.
Reduced staffing or staff working from home. Business, as usual, is not what it use to be at many FIs. Some are making do with less staff. Some are pulling staff from different departments to keep up with lending-related requests. Some have staff working from home. All these scenarios can create situations where oversight can be challenging, making it much harder to ensure regulatory controls remain effective.
4 Best Practices for Reducing COVID-Related Fair Lending Risk
Just because Fair Lending risk is on the rise, doesn’t mean that Fair Lending problems are expected. Make sure your FI is following these 4 best practices
- Follow existing change management processes. Your FI is accustomed to regulatory change, but not at this pace. Harness your existing change management processes to ensure all policies and procedures are updated to reflect new programs and changes to existing ones. It’s helpful to review and/or audit your process to make sure every step of the process is followed and nothing was missed in the rush to launch PPP or other lending-related programs. Change management is part of a strong (CMS).
- Assess compliance risk. Make sure your compliance risk management program is equipped to identify, measure, monitor, and control emerging risks related to the COVID-19 pandemic. If changes to your circumstances increase risk, adjust controls, or introduce new ones to ensure Fair Lending compliance. Now is the time to make sure your risk management system works in tandem with your CMS to help flag compliance risk.
- Monitoring existing controls. Your FI may be overwhelmed by increased consumer and business needs, but don’t skimp on monitoring. Continue to monitor controls as you normally do, including using Fair Lending analytics to quantify your performance and make enhancements as needed. More than just an algorithm, Fair Analytics software can quickly pinpoint the loans that are causing the disparity so that compliance officers can identify and remediate Fair Lending risk. Comparative statistical analysis of loan data is referenced by roughly half of the FFIEC guidelines for Fair Lending.
- Verify both in-branch and work-from-home (WFH) employees are trained and following policies and procedures. With an increased workload and employees working apart (whether at home, on different shifts, or socially distant), it’s essential that everyone is following the same policies and procedures, especially when it comes to lending. If everyone isn’t on the same page or managers aren’t able to monitor customer interactions and verify that WFH employees are strictly following policies and procedures, there’s an increased risk of disparate treatment and disparate impact on a prohibited basis.
Download our Work-From-Home Risk Assessment for a primer on the most common WFH IT, human resources, and compliance risks and how to mitigate them.
Don’t get caught off guard by Fair Lending issues. Make sure you’re taking action to avoid Fair Lending missteps and uncover issues before examiners do.