Bob Dylan originally released The Times They are a-Changin’ in January 1964. The lyrics are powerful and could serve as a theme song for today's banking executive. Accordingly, the Louisiana Bankers Association put forth a progressive agenda that featured sessions on Cloud Computing, Fair Lending, Stress Testing, and Person-to-Person Payments. During one of the technology sessions, I heard one banker whisper, “isn’t this change exciting.” Another replied, "exciting, scary, innovative and mandatory."
The conference served as a good reminder of the complexities associated with running a successful financial institution.
Before my presentation, I asked the audience to collectively shape a common definition regarding Fair Lending. The perspectives volunteered by the executives in attendance was consistent to what we hear across the country: there is a management struggle between Safety & Soundness (credit risk) and the Regulatory Compliance requirements. From Louisiana and points beyond, bankers want to be fair and equitable with their extension of credit. However, they also can feel pressure to possibly deviate from sound credit policies to appease the Fair Lending spotlight. Below are a few simplified thoughts on how financial institutions may want to approach the issue of balance.
1. FAIR LENDING COMPLIANCE MANAGEMENT: It has been our experience that the conflict can be successfully managed through sound compliance administration processes. In general, there are two things that we consistently recommend to community based organizations to proactively manage the potential for Safety & Soundness and Fair Lending Compliance conflict:
a. Maintain Clear, Fair and Consistent Credit Administration Policies and Procedures
b. Conduct a Regular Fair Lending Risk Assessment that includes Comparative Analysis
2. SUCCESSFUL MANAGEMENT OF LOAN OFFICER DISCRETION: Lets be clear...loan officer discretion is not illegal nor a forbidden word when it comes to Fair Lending Compliance. However, banks of all sizes can encounter regulatory concerns when there exists both loan officer discretion AND significant lending pattern disparities (between control groups and prohibited basis groups). A smart compliance management program will complement loan officer discretion with some simple measurements and monitoring processes:
a. Exception Reporting – Acknowledge when pricing and approvals are inconsistent with policies and procedures.
b. Documentation – When exceptions from policy and rate cards do take place, document the logic behind the exception.
c. Second Reviews – Taking a look at similarly situated individuals (e.g. credit score) to ensure that they are being treated similarly.
Bob Dylan was right, the times they are a-changin'. However, great customer service and smart risk management will remain the hallmark of successful community banking. Fair Lending compliance should not impede this success formula when the right focus is placed on the compliance management program.
Everyday, TRUPOINT Partners helps our clients succeed with Fair Lending, HMDA, CRA and related regulatory compliance needs. We would love to explore how we can help your organization succeed.
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