Improve Fair Lending Compliance by Watching the NFL's Second Reviews
The National Football League (NFL) carefully reviews and monitors the officiating of each and every game. From time-to-time, the NFL will acknowledge errors with the hopes of better future performance (and maintain trust of their fan base). For example, the NFL Office admitted Monday to a pair of officiating errors: one that let a bogus touchdown stand and one that allowed 79 seconds of game clock run off after the official waived for the clock to stop.
What does this have to do with your regulatory compliance you ask? Financial institutions can use Second Review programs for the same purpose the NFL does: to ensure compliance and integrity of execution.
In our business, we are often asked about effective monitoring programs for Fair Lending compliance. While our answer differs based on the unique needs, complexities and resources of the financial institution, statistical analysis is the most powerful and comprehensive approach.
Another commonly employed tool is the Fair Lending Second Review. The purpose of the Second Review is to ensure that lending standards are applied fairly and uniformly to all applicants. Many describe their Second Review process as a “Safety Net,” because it helps prevent discrimination.
In order for this process to be effective from a Fair Lending perspective, you may want to consider employing the following three success elements:
- COMMON REVIEW SOURCE AND PROCESS: Have a single or common source for review (e.g. Compliance Department) where they are in a position to objectively review all loans and compare similarly situated individuals across the financial institution.
- WORKSHEET AND CONSISTENCY: Use a worksheet or checklist to ensure a consistent review process is employed and considers all factors in the underwriting and pricing process (deficiencies explained, options offered, additional collateral, etc.). Use the worksheet to document the file. Some banks will use the Fair Lending worksheets to only focus on a review of the denials. Others find success by expanding the scope of the worksheet to include the technical aspects of Reg B (e.g. permissible signatures).
- REPORTING AND REVIEW: Regularly report the results of the second review process to management to ensure that any discrepancies are discussed, properly addressed, and the key learnings are shared with appropriate personnel.
TRUPOINT Viewpoint: If the NFL didn't have a Second Review process, they would lose their ability to hold their officials accountable and ensure that that each team benefits from a level playing field. This consistent rule-following (through monitoring) helps preserve the integrity of the game that is paramount to the success of the league.
The same is true for Fair Lending Compliance Programs. Monitoring and review brings integrity to the execution process. Even with rate cards, strict underwriting policies, and formal loan committees, exceptions are made and discretion is used to make smart risk-based business decisions. However, without the second review, it is possible that the organization could receive applications with similar characteristics and depending on the circumstance (e.g. experience of the loan officer), one loan could be approved and the other declined.
Exception management are one key area of Fair Lending risk, and the Second Review process and monitoring program can help ensure that your team consistently follows the rules. It can also help ensure that the integrity of your Fair Lending program is maintained.