Common Credit Union Fair Lending Mistakes & How the NCUA Decides Which Institutes to Examine
What are the most common fair lending findings at credit unions? How does the National Credit Union Association (NCUA) decide which credit unions will be examined for fair lending? What type of fair lending cases is NCUA most likely to refer to the Justice Department?
The NCUA’s 2020 Fair Lending Consumer and Compliance Regulatory Update Webinar looked back on the agency’s 2020 findings while looking ahead to 2021 and answered all those questions and more.
Spotlight on Marital Status & Age Discrimination
Since 2017 NCUA has referred seven fair lending cases to the Justice Department—and almost all of them have been related to either marital status or age discrimination. Four were for lending discrimination based on marital status and two were for lending discrimination based on age. Additionally, all current cases in the pipeline are marital status or age-related.
As a reminder, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering an applicant’s marital status or age when making loan decisions. It also requires agencies, including the NCUA, to refer discriminatory patterns or practices to the Justice Department even if they are unintentional.
Analysis: Where are Credit Unions Going Wrong?
What kinds of mistakes are credit unions making?
- Pricing loans based on the higher of the two applicants’ credit scores when they are married and based on the primary applicant's credit score when they are not married.
- Rejecting an application or terminating an account because the applicant is 60 years old.
- Disqualifying a loan applicant for automatic loan approval based on the applicant's age, if the applicant is of legal age to enter into a binding contract.
Credit unions should make sure lending compliance policies and procedures related to marital status and age are up-to-date and compliant and that staff is trained to follow them. Additionally, it is important to analyze the data to proactively identify disparities to allow for prompt corrective action.
Most Common Fair Banking/Lending Credit Union Violations
Some of the most common violations the NCUA encountered were on display during the webinar. Where did credit unions go wrong?
Regulation E. Examiners found at least one credit union violated Regulation E by failing to:
- Provide all the applicable initial disclosures related to things like the member's liability for unauthorized electronic fund transfers, the type of transfers the member may make, including those by ACH and mobile phone, and limitations on the size or frequency of transfers.
- Promptly investigating and determining within 10 business days of receiving a notice of error whether an error occurred. If not completed within this timeframe, the members’ accounts must be provisionally credited. Examiners found investigations that exceeded 90 days.
- Report the results to the member within three days after completing an investigation.
Such violations are a sign that a credit union needs to improve its compliance training and monitoring programs, the NCUA says.
Fair Credit Reporting Act and Reg V. When it comes to the Fair Credit Reporting Act and Reg V, examiners found at least one credit union failed to:
- Establish and implement adequate policies and procedures to ensure the accuracy and integrity of member information provided to a consumer reporting agency.
- Give account holders the one-time notice stating the credit union provides negative information to a credit reporting agency.
Payday Alternative Loans (PAL) or small-dollar loans. In some cases, credit unions that made Payday Alternative Loans (PAL) or small-dollar loans did not address all the prescribed criteria and limits for PALs. For example, they failed to address membership requirements and concentration limits in their lending policies. Others charged more than the allowed $20 fee limit on applications or did not set a limit on the aggregate dollar amount of PALs I or PALs II loans. Some credit unions did not cap the interest rate on non-PAL small-dollar loans (legal maximum 18 percent).
The Truth in Fair Lending Act/Regulation Z. At least one credit union was cited for inadequate data processing controls. In months where multiple mortgage payments were made in the same payment amount, payment processing created an overdue balance and late fee on the member’s account. Another finding was failing to include written itemization of the amount financed or payments made by others on behalf of the member. Additionally, in some cases, payments were misclassified as funds given to the member. In at least one case, finance charges omitted necessary information, and APRs were inaccurate and outside allowable tolerance.
Military lending. Credit unions aren’t expected to have separate policies for the Military Lending Act or the Servicemembers’ Relief Act, but they must comply with them. Identified findings included failing to determine covered borrower status and failing to perform proper due diligence for loans subject to credit-related ancillary products. Additionally, in some cases uploaded data was miscoded or uncoded, suggesting inadequate staff training and monitoring policies.
NCUA’s 2021 Priorities
When it comes to consumer compliance exams, NCUA plans to focus on Fair Lending, including “a review of the resources credit unions devote to Fair Lending” and the institutions’ COVID-19 response. This is especially true for loan forbearance and other accommodations and limits on credit reporting.
Compliance management systems (CMS) will be assessed as part of consumer protection reviews focused on both mortgage and non-mortgage loans. The NCUA wants to see that credit unions are fairly and consistently providing forbearance options, including the mortgages under the CARES Act protections. They will be on the lookout for unfair, deceptive, or prohibited practices in the modification process.
There is an underlying commonality with each of these issues: the need for an effective compliance management system.
A good CMS includes:
- Board and management oversight of change management, risk management, and corrective actions.
- A formal compliance program with policies, procedures, training, monitoring, and complaint responses.
- An audit function.
Is your institution’s CMS protecting you from Fair Banking/Lending compliance risk or does it need improvement? Do not wait for examiners to tell you your CMS is flawed. Make sure you are taking steps to monitor your compliance management system’s performance and actively strengthen your CMS, if needed.
To learn more, download our whitepaper: What is a CMS and Why Do I Need One?