CFPB’s Latest Fair Lending Report Provides Compliance Insight, Advice
The CFPB continues to lead the regulators in expressing regulatory priorities, sharing compliance insights and signaling areas of exam focus. With the release of the recent Fair Lending report of the Consumer Financial Protection Bureau, the CFPB has done it again. They are providing a clear road map for financial institutions who choose to listen.
5 Insights About the CFPB
A quick review of the latest report provides 5 key insights about the CFPB and its Office of Fair Lending. From this report, we know that the CFPB is:
1. Improving Efficiency: The CFPB is working to make their processes more efficient and effective. The risk-based prioritization program is one of their methods for improving efficiency. We’ll cover that risk-based prioritization in more detail later, but essentially it means that the Bureau evaluates institutions’ fair lending risk and takes action based on who has the most risk.
After the recent report from the OIG titled “The CFPB Can Improve the Efficiency and Effectiveness of it’s Supervisory Activities,” the CFPB is smart to show that they are working to improve their efficiency and efficacy. (View the report here, or the executive summary here.)
2. Still Focused on Fair Lending: In the report, the Bureau notes that Fair Lending is still their priority. Specifically, they are focusing on Fair Lending risk in Mortgage Lending and Auto Lending. “Based on data and information gathered and analyzed by the Bureau, we identified mortgage lending and auto finance as key priorities for our supervision and enforcement work,” the report says.
3. Emphasizing Data-Driven Analysis: The Bureau is, by their own definition, a data-centric organization. The CFPB uses qualitative and quantitative data. That is, they use the loan data to find disparities, but they also use qualitative data like complaints to evaluate lenders’ Fair Lending compliance. As their data analysis becomes more sophisticated, so too will their exam process. It’s critical to know your numbers.
4. Leveraging Data Findings: The CFPB is enhancing its data collection and analysis using market insight and trend analysis. Using the market analysis, the Bureau can explore macro-level, industry-wide trends to flag potential Fair Lending trends and issues. Then, they can analyze at the micro-level using each individual institution’s data. This firepower also makes the CFPB a regulatory force to be reckoned with.
5. Encouraging Diverse Industry Participation: Through encouraging use of a complaint database, open forums, data visibility, and various publications, the Bureau is aggressively looking to engage with the public. They’re also working to establish a collaborative compliance environment with other regulatory agencies.
3 Key Takeaways from the CFPB's Fair Lending Report
This report shows lenders clearly what aspects of their compliance program they should review. We've broken it out into three key takeaways:
1. Strengthening your institution’s Fair Lending compliance management system (CMS) should be a priority. Fair lending remains at the forefront of regulatory compliance focus. Therefore, the inherent risk associated with Fair Lending is high. You must have a solid fair lending compliance management system in place to help control and reduce the residual risk.
“One critical piece of information the Bureau obtains through our supervisory work is the quality of an institution’s fair lending CMS, which is a key factor considered in the fair lending prioritization process,” the report states. When the CFPB evaluates your institution based on a complaint or data analysis to prioritize exams and supervisory actions, they will review your CMS. That means it needs to be strong.
2. The Fair Lending compliance exam analysis starts and ends with your data. The CFPB and other regulators are data-centric. You need to take the time to know your numbers. We’ve said it before and we’ll say it again: your data tells a story. You need to know what that story is, and be able to explain it to the regulators. It’s absolutely critical to keep your data in good condition and monitor it actively. Without well-maintained and monitored data, your CMS simply is not complete.
3. Actively maintain, listen, and respond to the complaints about your institution. Your CMS needs to include complaint management policies and procedures, and your employees must understand your approach and process of compliant management. Fair lending risk exists at every financial institution. This is especially true when you evaluate the technical requirements associated with the Equal Credit Opportunity Act, Regulation B, Fair Housing Act, and Home Mortgage Disclosure Act. If you have not recently evaluated your institution’s compliance management system and risk tolerance, now might be a good time to do so.
A Fair Lending risk assessment will help you focus your time, your energy and precious resources. The risk assessment and the process of evaluating your organization should provide you a good understanding of the underlying market/business risk (inherent risk), evaluate your compliance systems (controls), and determine residual risk after controls.
- CFPB Fair Lending Bulletin - Confirming Disparate Impact: Click Here
- CFPB Fair Lending Bulletin - Auto Lending and Compliance with ECOA – March 2013: Click Here
- CFPB Fair Lending Report - April 2014: Click Here
- Review the CFPB's Complaint Submission Process: Click Here