We have known for months that fair lending is a regulatory hot topic and that banks, mortgage companies, and fintech companies should be on guard. Now we are hearing from the National Credit Union Administration that credit unions should also be on alert.
Already this year:
- The Federal Reserve. In June Fed Chairman Jerome Powell said the Fed is “definitely recommitting ourselves to the enforcement of fair lending laws.”
- The Consumer Financial Protection Bureau (CFPB). The CFPB is pursuing action against mortgage companies that engage in misleading or deceptive practices while encouraging small business owners who felt they were discriminated against when applying for Paycheck Protection Program (PPP) loans to speak up.
- Office of the Comptroller of the Currency (OCC). Earlier this fall the OCC said fair lending examinations and risk assessments will remain a high priority. Additionally, the agency plans to look at pandemic-related loan accommodations and loss mitigation efforts as well as new technology used in underwriting processes. (The OCC will also follow up on how its new CRA guidance is implemented.)
Credit Unions & Fair Lending
The NCUA has not released any new statements on fair lending which leads some credit unions to assume that the agency is not actively enforcing Fair Lending. But the NCUA is watching, according to CUNA’s Chief Compliance Officer and Counsel Jared Ihrig. During a recent virtual CUNA conference session, Ihrig noted based on CUNA’s conversations with examiners, fair lending is a “hot spot” and predicted that fair lending exams are likely to increase in 2020 and 2021.
Where are credit unions making mistakes? The most common issues include:
- Missing filing deadlines of the loan application register (LARs) as required by the Home Mortgage Disclosure Act.
- Not properly aggregating or capturing data across credit union loan origination systems.
- Not providing specific enough adverse action notices related to Regulation B.
- Misinterpreting Servicemembers Civil Relief Act rules on rate reductions and Military Lending Act definitions of a “covered borrower.”
- Fair Credit Reporting Act complaints.
- Ensuring debt collection and credit scoring is included in fair lending efforts.
Don’t Forget Vendor Management
The session also highlighted the importance of third-party vendor management when it comes to fair lending and other compliance issues. When a vendor engages in an activity on behalf of a credit union, that credit union will be held responsible for the vendor’s actions on behalf of the credit union. From a regulatory responsibility perspective, there is no difference between actions taken by a credit union and those of its vendors. Blame the vendor is not an acceptable defense.
Mortgages & Credit Unions
When it comes to mortgages, avoiding misrepresentations is of the utmost importance. Ihrig made special mention of avoiding misrepresentations of:
- Credit terms and annual percentage rate.
- Advertised rates and payments as fixed.
- Cash or credit available.
- Fees and costs.
- Number of payments over the loan’s life.
On the mortgage servicing side, he emphasized disclosures for loss mitigation, bankruptcy, and delinquent borrowers as well as private mortgage insurance and escrow.
How to Guard Against Fair Lending Disparities
Fair lending disparities are surprisingly common. They can be found everywhere from banks and credit unions to fintech start-ups. It can even happen when an institution is trying to be altruistic.
Consider fee waivers. Many customers experiencing financial distress right now, leading your institution to waive some fees. It is a helpful thing to do, but it can also create an impact and potential issues institution if fee waivers aren’t offered consistently. Without clear policies, staff will rely on their own judgments, which can lead to disparate treatment if similarly situated consumers are not offered the same accommodation. The same can be said if an employee disregards a policy in order to help a customer or member.
The only way to know for sure that your FI is complying with fair lending is to take a hard look at data and we are not just talking loan data. Banks, mortgage companies, credit unions, auto, and student lenders should all be analyzing their data to uncover fair lending disparities. Focus not only on loan data but look to complaints and fee waivers as well.
Choosing not to analyze data increases fair lending risk, leaving open the possibility that examiners will find a problem you did not.
Do you know if your institution is complying with fair lending laws? Want to learn more about how Fair Lending Analytics can help?
Find out when you read our article Is Your FI Complying with Fair Lending Laws? – Leverage Analytics