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8 Key Questions to Help You Determine Your Unique Fair Lending Risk

6 min read
Jul 6, 2017

Here are 8 questions you need to ask about your Fair Lending compliance program, and one ultimate question. Can you answer them all?

In our work with financial institutions nationwide, we are often asked a deceptively simple question: is there an easy way to test our Fair Lending compliance?


The answer is, as you might have expected, yes and no. Luckily, there are relatively easy ways to identify potential risk exposure. Identifying and managing these risks is an important initial step in achieving Fair Lending compliance success.

In this post, we will share 8 questions every compliance professional should ask of their Fair Lending compliance program to identify risk. After those 8 questions, we will share the ultimate question you need to answer in order to know your Fair Lending risk.

[Free Resource: Fair Lending 101 Info Kit!]

At their cores, the Fair Lending regulations are designed to prevent discrimination and ensure that similarly situated individuals are treated similarly throughout the lending process. As you consider the following question, keep this in mind, because it may guide your answers.

8 Essential Fair Lending Compliance Questions (and the Ultimate One)

While there is not a single, magical question, there are a series of questions that can help you understand your current Fair Lending compliance risk exposure. Let's jump right in:

1. Does your financial institution have a strong Fair Lending compliance culture? 


In today's compliance environment, it's important to have a culture of compliance that supports compliance efforts and informs the perspective of everyone in the institution. Try to get a feel for any compliance culture that has been established and its impact on attitudes, policies, practices and procedures.

Do you have a history of consumer complaints? Are there concerns expressed in prior exams? Does everyone receive annual Fair Lending training, including the Board and Senior Management? 

Regardless of its size or business model, “a financial institution with a poor culture of compliance is likely to have shortcomings” in its compliance program, according to FinCEN.

Written policies and procedures are a great start, but they only gather dust unless you actively coach, teach and train your team and your team believes in the value of compliance.

compliance-experts-trupoint.jpg2. Are there any specific credit products that represent an appreciable volume of the bank’s lending, or that demonstrate noticeable growth? 

The greater the lending volume, the larger the number of consumers potentially exposed to discrimination. High loan volume warrants specific attention and focus. Regulators are trained to set exam focal points based on high volume and growth.

3. Are there explicit prohibited-basis identifiers listed in your financial institution’s policies or procedures? 

Check to make sure there are no institutional statements that reflect attitudes based on prohibited basis characteristics, or prejudices or stereotypes.

[Read More: 5 Real-World Examples of Fair Lending Discrimination]

4. Does advertising imply that any group of customers are more or less desirable based on a prohibited-basis? 

Review your advertising program to ensure ads proportionately reflect your market's population, and that marketing and advertsing efforts do not exclude geographic areas with a high percentages of minorities. That could lead not only to Fair Lending issues, but also potential Redlining risk.

Marketing efforts should address, encompass and serve all segments of a financial institution's market area.

5. Do you allow loan officers to use discretion or exceptions in the underwriting or pricing process? 

Consider whether your senior lenders have the ability to adjust interest rates or terms. Ask yourself: Is there vague or subjective underwriting criteria? For example, what does “good character” really mean? Does every loan officer in the bank define it the same way? Is there guidance on making exceptions (including credit-score overrides)?


6. Do you have clear, objective and consistently implemented standards for referring applicants to specific product lines? 

Steering is the practice of deliberately guiding applicants toward or away from certain loan products or lending channels on a prohibited basis.

According to the FDIC, steering risk may exist if there is a lack of clear, objective, and consistently implemented standards for: 

  • Referring applicants to subsidiaries, affiliates, or lending channels within the bank;
  • Classifying applicants as “prime” or “sub-prime” borrowers; or
  • Deciding what kinds of alternative loan products should be offered or recommended to applicants.

Special attention needs to be given to products and features that may have potentially negative consequences for applicants. This becomes more complicated for a financial institution with subsidiaries, affiliates or third parties. Are there records that detail policy exceptions or overrides, exception reporting and monitoring processes?

7. Do you have consumer complaints, and are they well-managed? 

Consumer complaints can provide additional information about how consumers are experiencing your company and brand, and also provide a valuable source of insight about potential Fair Lending risk.

Sometimes critical comments or complaints are the first indication that your compliance management program may not be working. In addition, the regulators require that you manage your complaints as part of your compliance program.


Complaint management should include training, policies and procedures, and a process for fielding, responding to, tracking and reporting complaints. 

Pay particular attention to complaints that allege discrimination, either submitted directly to your instituton or to third parties like the CFPB or social media. These sorts of complaints are an early warning system for compliance officers that something may be amiss. They are also likely to attract the regulators' attention.

8. Do you have consistent standards for servicing a loan, providing assistance or invoking remedies? 

A lender may not express a preference on prohibited factors or indicate that it will treat applicants differently on a prohibited basis.


The Ultimate Fair Lending Question

These eight questions are important, but there is one simple question that you can ask about your Fair Lending compliance. Ultimately, it comes in the form of comparative analysis:

9. Do you have disparities when you compare prohibited basis groups to the control group?

It is impossible to know where to focus your compliance efforts when you haven’t conducted a review to learn where your risks may lie. Do you analyze your data for Fair Lending compliance? This should include HMDA and non-HMDA data. 

In addition, do you perform an enterprise-wide Fair Lending risk assessment every year?


Ncontracts Viewpoint: Fair Lending compliance is complex, and there is no one answer or approach that will reduce your risk. However, asking the right questions will enable you to efficiently and effectively manage Fair Lending compliance risk.

One easy way to identify your potential risk exposure is to analyze your data for disparities that may indicate Fair Lending compliance risk. Are you analyzing your data? If so, are you doing it manually or leveraging a software?

If you're using a software, how long does it take you to get usable answers? How long is training? Does it require time-consuming core integration? Do you have unlimited support and guaranteed success?

With Ncontracts on your side, Fair Lending compliance management is simple, cost-effective and helpful. We'd love to show you how Ncontracts can improve your Fair Lending analysis. Click to get a free demo today!

Related: Lending Compliance Management, Made Simple

Editors' Note: This post was originally published in May 2012. It has been entirely updated and reviewed for accuracy.

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