Fair Lending Risk: Do You Have a Seat at the Risk Management Table?
Your institution might be using compliance analytics software and services for Fair Lending, HMDA, CRA, or Redlining so that it can recognize risks, increase transparency and grow smartly.
But are you making the most of that data from a risk management perspective? Not if that data is only used by the lending, credit, or compliance departments.
While compliance and lending are the most closely linked to Fair Lending risk, the truth is that Fair Lending extends into many operational areas. From marketing to the location of new branches to M&A, Fair Lending risk has a role to play in decision making.
Read on to learn about the overlap between Fair Lending and other operational areas and how to best manage this risk.
The Relationship Between Marketing & Fair Lending
Where is your institution advertising and who is it marketing to? It makes a difference.
Marketing efforts are typically concentrated on attracting the most profitable consumers, with ad dollars being spent where those people are most easily reached. From a business standpoint, that makes sense. But from a Fair Lending standpoint, it can create issues.
When marketing only reaches out to specific market segments, it often fails to reach other qualified borrowers. For example, an ad in Town & Country will reach a very difference audience than one in People magazine. If an institution only ever tries to reach the Town & Country readers, it will be less likely to reach others in the community—narrowing the potential pool of loan applicants.
It’s an increasing problem in the digital age, where advertisers can micro-target consumers based on specific characteristics. It’s one thing to target small business owners, but an entirely different matter if it’s used to specifically exclude someone based on their age, race, gender, disability or a member of another protected category. There’s even a term for it: digital Redlining.
It’s already been the source of several lawsuits. Earlier this year, Facebook settled a suit saying it would take steps to stop advertisers from using age, gender and other protected categories when targeting job, housing and credit ads. Last month a class action suit accused Facebook of excluding women and older people from financial services product ads, including for loans.
Click here for tips on How to Analyze Your Advertising and Marketing Data for Redlining Risk!
Making the Connection Between M&A & Fair Lending
Fair Lending plays a role in M&A, both before and after a transaction.
M&A activity can draw increased regulatory scrutiny, including Fair Lending and CRA compliance. Whether it’s community activists questioning the lending activities of an acquiring institution or regulators putting an acquisition on hold due to downgraded CRA ratings.
An acquisition or merger can also change MSA or market area definitions, impacting demographics and elevating your risk profile for CRA and Fair Lending, as well as altering your branch network and delivery channels.
Integrating Fair Lending into ERM
Your Fair Lending data, analysis, and insights can do more than help your institution improve its loan processes and decisions. It can help it make better strategic decisions as part of a strong enterprise risk management (ERM) program.
Rather than be caught off guard with problems once a marketing campaign, M&A activity, or other initiative has launched, including Fair Lending risk in the list of potential risks when assessing new products or activities can head off problems.
It’s up to the board and management to structure and oversee ERM and avoid silos, but that doesn’t mean there isn’t anything you can do to ensure Fair Lending concerns are heard.
Here are three steps you or your department can take to advocate for the importance of Fair Lending risk:
- Build relationships. The first time you approach someone in another department, it shouldn’t be to criticize their actions and how they have created Fair Lending compliance challenges. Make a point of reaching out to staff in areas that impact Fair Lending compliance and building relationships. It’s much easier to have a conversation about a problem if you’re not viewed as someone who only calls when there is bad news.
- Communicate. People are so focused on their own goals, they often have blinders on to others’. Don’t be afraid to speak up if you see a potential Fair Lending issue. It’s better to deal with a potential speed bump at the beginning when plans are most flexible.
- Provide clear, regular reports. Create regular reports highlighting key facts and trends. It will make it easier for those above you to understand what’s going on and assess the risks.
As Fair Lending risk continues to evolve, the most successful institutions will be those that address Fair Lending and other risks using ERM. By centralizing risk management and increasing risk visibility, your financial institution can leverage institutional knowledge for deeper insights, better oversight, and increased efficiency.
Ask yourself if Fair Lending has a seat at the risk management table and what, if anything, you can do to help ensure Fair Lending risk is considered when making strategic decisions. Operating in a silo is not an option.
To learn about the 2018 HMDA peer data and what it might mean for your institution, download our Fast Facts Guide!