Credit unions are subject to fair lending regulations just as banks are, and they must have the processes in place to meet those obligations. Here we debunk some of the most common myths about fair lending compliance for credit unions.
Myth #1: We cannot have a fair lending issue. All our members meet strict eligibility requirements, so they are similarly situated and are always treated the same.
While credit unions do require that members meet certain requirements to satisfy a common bond, many of these are broad and few of them truly limit membership. There are many factors that influence a fair lending program (including loan volumes, market diversity, and product complexity), and ECOA, FHA, and other pertinent acts do not offer equal treatment exemptions. Therefore, stating your institution would not have a fair lending issue based on membership standards can be a risk to your program.
Myth #2: We have written policies and procedures so we don’t need to worry about fair lending.
Having well-written policies and procedures is a great start. However, risk management does not stop there. Policies and procedures need monitoring and review to ensure they are effective in practice.
Related: What is a Fair Lending Compliance Management System?
Myth #3: Our employees fully understand fair lending.
Most employees have a working knowledge of fair lending compliance and do not intend to discriminate. However, without regular role-specific training, management reinforcement, and monitoring of lending patterns, financial institutions have unmanaged risk.
Myth #4: We are a credit union, so disparate treatment is not an issue for us.
Many credit union leaders believe they are safe in the event their credit union is examined for disparate impact. They believe this because they “know” they do not discriminate against members in protected classes. If this were fact, data would support the assumption. However, with the ability to make exceptions to rates, loan to value (LTV), debt to income (DTI), and credit score, you run the risk for disparities and the potential for fair lending issues.
Myth #5: My credit union is too small to be concerned about disparate impact.
If you take this position because the Consumer Financial Protection Bureau (CFPB) does not regulate credit unions, you may be in for surprise. The National Credit Union Administration (NCUA) and some state regulators have begun randomly conducting fair lending exams at credit unions across the country. Credit union employees have reported that the exams are difficult to the point of not understanding some of the questions that were being asked of them. As a result, they did not have the relevant data available to defend their position.
Further, the recent Supreme Court decision opens a door for consumers to bring suits directly against credit unions. The last thing a lender wants is to have a plaintiff’s attorney inquire about the controls and testing they have in place to prevent disparate impact—and not be able to respond.
Related: Is Your FI Complying with Fair Lending Laws? - Leverage Analytics
Myth #6: My credit union does not allow auto dealers to mark up the rate.
The dealer may not be able to mark up the rate, but there is still the opportunity to have different pricing for similarly situated borrowers, especially if rates are marked down to make a deal happen, which carries a strong risk of disparate impact. Therefore, it is important to analyze data to ensure pricing disparities do not exist, not only across the portfolio but within the same dealer relationship.
Myth #7: We give rate discounts to our existing members coming through our indirect program. They deserve it because of their loyalty.
Whenever or however someone becomes a member of a credit union does not change the fact that they are a member. Credit unions have always prided themselves in the one member, one vote philosophy.
Let’s think this problem through. Let’s say that a credit union was once a single-select employer group (SEG) credit union, and the membership was made up primarily of white males who worked for that SEG. Now the credit union has switched to a community charter and is expanding its field of membership. Based on that philosophy, it makes sense that most of the people who would qualify for the existing member discount would be white male applicants. This could create an unintended consequence of disparate impact.
Preferred treatment causes challenges, no matter the race or sex of the applicant. No one wants to think or feel that others are getting preferred treatment, and it only makes matters worse when that special treatment creates a disadvantage.
If your credit union is handling fair lending compliance based on myths, you may be vulnerable to errors that could lead to exam findings (and costly penalties). Make sure you understand the most common mistakes credit unions are making, so you can avoid them. And don’t forget to analyze your data for signs of fair lending disparities.
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