3 Fair Lending Risks Lenders Need To Know, Plus A Free Risk Assessment
Lenders are an important part of your Fair Lending compliance management program. They should have a strong working knowledge of Fair Lending and how it applies to your organization. Here are 3 Fair Lending compliance risks your lenders should help the firm proactively manage, and tips for how to mitigate risk.
Lenders have a different, and important, vantage point when it comes to regulatory compliance. It is always beneficial to acknowledge unique perspectives. We were able to explore some of those unique perspectives at the Independent Community Bankers Association of New Mexico. The team at Ncontracts wants to thank the ICBANM for the opportunity to speak and spend a few days at their annual Lenders Conference.
At the core, Fair Lending is about treating similarly situated individuals the same. As a group, the lenders at the conference discussed some of the more common Fair Lending trip wires.
Here are 3 of the Fair Lending risks that lenders need to keep in mind, and tactics for risk management:
1. Do You Have Clear Policies and Procedures?
Vague or subjective policies and procedures allow for individual interpretations by loan officers, underwriters, collections, and service team members. These interpretations may lead to similarly situated individuals being treated in a different manner, which is exactly what Fair Lending compliance management programs work to prevent.
Manage Your Risk: Review Policies and Procedures for vague or subjective language. One common example in underwriting is the use of “character.” How does the bank define character? Without this definition, does everyone within the organization have the same opinion of the term? That's just one example of potentially vague or subjective language that you should look to avoid.
2. Do You Have Discretion & Exceptions?
The more discretion permitted, the more Fair Lending risk an institution assumes. Exceptions are closely tied to discretion. Financial institutions should take the time to define the guardrails to help control discretion and exceptions, and ensure similar treatment.Manage Your Risk:
- Define: Outline when discretion and exceptions are permitted. Are you willing to go below a 620 credit score? Define the approval and oversight process. Does management need to approve a pricing exception suggested by a loan officer?
- Track: You also should be tracking the exceptions (e.g., frequency of approvals and denials, trending, mitigating factor reason codes).
- Document: Make sure to document the file so the action (approval or denial of exception) is in file with enough clarity that allows the loan file to stand on its own.
3. Are You Monitoring Results?
The validity of your policies and procedures can only be measured if you are monitoring the results of your lending patterns. The regulators are becoming increasingly focused on your data; therefore, it is critically important that you review your lending data.Manage Your Risk:
- Analyze HMDA Lending: Do you see disparities between prohibited basis groups (e.g., race, ethnicity, gender) and control group (e.g., the group least likely be discriminated against)? Differences in pricing, underwriting, and application flow are three of the most important areas to review.
- Analyze Consumer and Small Business Lending: Fair lending is not limited to mortgage lending. ECOA applies to all credit transactions. If consumer lending and small business lending is an significant part of your financial institution, the data should be reviewed.
- Conduct Audits and Reviews: Your team should conduct transactional audits on Regulation B (e.g., adverse action, spousal signatures, etc.) and share the results with compliance, management and the appropriate team members.
The lenders in Albuquerque also reviewed an abbreviated Risk Assessment in an attempt to have them assess some of the key areas of Fair Lending risk. We've included this free simplified risk assessment here. Click to get it. This simplified risk assessment should help get the right conversations going inside your financial institution, beyond the compliance department.
Related: Creating Reliable Risk Assessments
Ncontracts Viewpoint: Fair Lending is about being fair. You can successfully manage fair lending risk with the appropriate controls in place.
One specific control is for the financial institution to embrace the concept that Fair Lending is a team sport. It requires everyone on staff to be active participants in the compliance program (especially lenders). Beyond compliance, your lenders should be aware of the common trip wires and ways to help mitigate this risk.
Based on our dialogue during the conference, it was abundantly clear that the community bankers in New Mexico are diligent about being fair in their lending efforts. Thanks again to Jerry Walker, President and CEO of ICBANM, Ron Shettlesworth, Chairman of the ICBANM, and George Ruth, the Conference Chairman & Host, for the opportunity to discuss best practices.