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The 8 Steps to Scoping a Fair Lending Compliance Exam

The 8 Steps to Scoping a Fair Lending Compliance Exam

Posted by Kimberly Boatwright, CRCM, CAMS on Sep 22, 2021 5:07:09 PM
Kimberly Boatwright, CRCM, CAMS
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When it comes to fair lending exams, surprises aren’t fun. What will the examiners look at? How do they decide what to cover?  

Fortunately, the regulatory agencies don’t try and hide this information. The Interagency Fair Lending Examination Procedures (updated in 2009 by the OTC, FDIC, Federal Reserve, OTS and NCUA) details exactly how examiners should determine the scope of a Fair Lending exam—an umbrella that covers multiple laws and regulations, including the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), Regulation B, the Community Reinvestment Act (CRA), and more. The Interagency document provides a roadmap for both examiners and financial institutions that can be used to proactively manage Fair Lending compliance. 

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There are four distinct exam segments outlined in the Interagency Fair Lending Exam Procedures: 

      • PART I:  Examination Scope Guidelines 
      • PART II:  Compliance Management Review 
      • PART III:  Examination Procedures 
      • PART IV:  Obtaining and Evaluating Responses from Institution and Concluding the Exam 

In this blog post, we’ll focus on Part 1: Examination Scope Guidelines and the eight steps regulators take when scoping a Fair Lending exam. 

Examiners begin the Fair Lending exam process by assessing the scope of the exam. They review various areas of risk and determine the focal points. They’ll also review loan product(s), market(s), volume, decision center(s), time frame(s), and prohibited basis and control groups. Unique focal point(s) will be based on risk factors, priorities established by the agency, the financial institution's unique record from prior exams, and other relevant guidance. 

Let’s take a closer look at the 8 steps examiners follow when determining exam scope. 

1. Build an overview of operations and product offerings. The examiner will determine the nature and amount of information required. No single exam will evaluate every compliance performance factor in every product. Questions to consider: 

      • Which products and prohibited bases were reviewed during the most recent prior examination(s)? Which products and prohibited bases have not recently been reviewed? 
      • Which prohibited basis groups make up a significant portion of the institution’s market for the different credit products offered? 
      • Which products and prohibited basis groups did the institution review using either a voluntarily disclosed self-test or a self evaluation?

2. Identify compliance program risk factors. Review exam work papers, institutional records, organization structure, auditing, policies, and procedures to assess the institution’s Fair Lending compliance systems. The examiner will consider risk factors such as prior weak compliance performance and quality of the compliance management system (includes oversight, staffing, policies and procedures, and fair lending training, among others).  

3. Review residential loan products. Home mortgages may not be the main subject of every Fair Lending exam, but if an institution is engaged in residential lending, this product line must at least be considered in the course of scoping. If past exams show a strong record of fair lending compliance, the examiner may instead focus on alternative underwriting or processing centers or residential products that haven’t been scrutinized much. 

4. Identify residential lending risk factors. Review the lending policies, marketing plans, underwriting, appraisal and pricing guidelines, broker/ agent agreements and loan application forms of each residential loan product that represents an appreciable volume of the residential lending. Examiners will look for indicators of discrimination and indicators of potential disparate treatment in underwriting, pricing, redlining, and marketing and by steering.  

5. Organize and focus risk & disparity analysis. Review the discrimination risk factors in step #4 and dig deeper. Consider your risks by loan product at every stage of the lending process, and keep an eye out for disparities (compare prohibited basis group versus control group).  

6. Identify consumer lending risk factors. For any consumer loan products where risk may exist, conduct a risk factor review similar to that conducted for residential lending products, including the assignment of surrogates to identify prohibited basis groups. Examiners will then apply the rules in steps three to five above to consumer lending. 

7. Identify commercial lending risk factors. Where an institution does a substantial amount of lending in the small business market, consider conducting a review similar to that for residential lending products.  

8. Complete the scoping process. Review the results and select those focal points that warrant further examination (based on the relative risk levels). Examiners will structure the scope of additional testing by comparative file analysis in areas with the highest risk. 

Now that you know how regulators scope a fair lending exam, make sure you’re ready to answer likely questions. 

Fair Lending analysis can identify disparities that can become focal points of your exam. Disparities don't always mean discrimination, but analyzing your data is the only way to know for sure. Be ready to tell your institution’s fair lending story at your next exam—and make sure you have an efficient and effective compliance management program in place.   

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Topics: Fair Lending