How COVID-19 Is Impacting Fair Lending Compliance
COVID-19 is overwhelming many sectors of the U.S. economy—including lenders.
Small business loan demand is through the roof thanks to government assistance programs, while low mortgage rates have resulted in high demand for refinancing. Meanwhile, lenders are dealing with the stress of working from home or in offices with limited staff.
Despite this turmoil, one thing remains constant: Fair Lending compliance.
Sure, the Consumer Financial Protection Bureau (CFPB) has postponed HMDA data collection for the foreseeable future. Examiners are conducting exams off-site as they work remotely. The regulatory agencies are “recommending” that financial institutions work with consumers.
However, Fair Lending regulations have not been suspended.
In fact, you could argue that Fair Lending concerns have actually increased since the Coronavirus Aid, Relief, and Economic Security Act (more commonly known as the CARES Act) passed in March, giving FIs temporary tools for helping consumers. These temporary changes designed to help small businesses and consumers impacted by COVID-19 include everything from halting foreclosures on federally backed mortgages and enabling forbearance to the Payment Protection Program. It’s also made short-term changes to consumer reporting requirements and mortgage loan servicing.
How COVID-19 Impacts Fair Lending
Every FI has its own unique business model, circumstances, and customers/members. Solutions that work at one institution may not be effective at another.
The CARES Act recognizes that financial institutions need added flexibility during the pandemic crisis. That’s why, in many cases, it gives options to FIs. For example, when it comes to “accommodations,” the term is left open-ended so it can include a variety of modifications including:
- Partial payments
The question is: What does an FI do with those options?
Not every FI centralizes loan decisions. Many leave them in the hands of individual loan officers, even after the loan is closed and servicing has begun. If you give loan officers a list of potential accommodations, they’ll certainly use them—but they might not all use them the same way.
One loan officer might assess a situation and decide a deferral is in order while another might suggest a partial payment. This discretion can lead to disparity and Fair Lending violations if similarly situated individuals are treated differently.
This is just one example. The CARES Act leaves open a variety of options on everything from loan applications to timeframes and contact methodology for mortgage loan servicers to what accommodations are made.
That’s why it’s important for an FI to evaluate all the available options and make decisions about how they will be handled. Policies, procedures, and guidelines should be updated to reflect these temporary changes and then communicated to staff.
Long-Term Fair Lending Concerns
Regulators, examiners, and other enforcement agencies may be dealing with the crisis right now, but they always come back to Fair Lending.
Consider JPMorgan’s $53 million settlement with the Justice Department in 2017. The bank was accused of recklessly disregarding the rights of at least 53,000 African-American and Hispanic borrowers and willfully violating the Fair Housing Act and the Equal Credit Opportunity Act (Reg. B) between 2006 and 2009. The suit claimed a lack of monitoring and loan reviews resulted in disparate impact affecting a group of their customers. (The bank denied wrongdoing.)
Two points of note:
- The settlement came eight years after the alleged offense ceased. When the Justice Department encountered the issue, they didn’t decide the past was in the past. They pursued it.
- The alleged events occurred during the 2008 financial crisis. At the time of the alleged events, the U.S. financial system was melting down. Investment banks failed. The Great Recession began. Clearly, the Justice Department didn’t accept that as an excuse.
As FIs grapple with new government lending programs and borrowers with new expectations, it’s important to consider the fair lending implications. Make sure your FI is updating policies, procedures, and guidelines to ensure consistency.
To learn more about managing fair lending challenges during the COVID-19 pandemic, register for our webinar A CFO's Guide to Audit and COVID-19 - What Have We Learned So , Wednesday, May 13 at 2 p.m. CT.