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Why You Need to Know Your Unique Demographics to Accurately Assess Your Fair Lending Risk

2 min read
Aug 6, 2015

Understanding your Fair Lending risk starts with understanding your market area's unique demographics. Here's a free tool from the government that can help you get started!

I had a great opportunity to speak to a wonderful group of bankers at the ICBA - New Mexico Annual Meeting last week. As consultants that work with associations and financial institutions across the country, it is always valuable to personally experience different points of view by visiting different regions.

For example, US-70 is the road between Ruidoso and Roswell, New Mexico is an amazing drive.  The highway contains some uniquely beautiful views that that you don’t typically find in other states. Here is a snapshot from mile marker 300 on the ride back to the Roswell Airport.  

Beyond the geography, every market has unique attributes. These unique attributes may create risk for their respective business.

Understanding these differences is one of the many reasons why consulting is such an engaging job.

We are exposed and sensitized to different organizations and their unique approach to serving their respective markets.  New Mexico’s demographics, for example, look very different from the rest of the country. The table below is a simple example of a few of the unique demographics of New Mexico. 

The table highlights the fact that there are fewer African Americans, higher American Indians and higher Hispanics or Latinos in New Mexico when compared to the US population.

Why Is It So Important To Understand Your Unique Demographics?

Understanding these unique demographics is important for all financial institutions and regulators. Why is this important? Because understanding Fair Lending risk actually starts with evaluating the underlying market. This is outlined in the Interagency Fair Lending Exam Procedures.

The Interagency Fair Lending Examination Procedures instructs examiners that “before evaluating the potential for discriminatory conduct, the examiner should review sufficient information about the institution and its market to understand the credit operations of the institution and the representation of prohibited basis group residents within the markets where the institution does business.” The examination procedures go on to state that “relevant background information includes: the demographics (i.e., race, national origin, etc.) of the credit markets in which the institution is doing business.”

Financial institutions should take the time to understand their market area demographics and compare back to their lending patterns. Are there disparities? Are they significant? 

According to the exam procedures, indicators of potential disparate treatment in Marketing include: “proportion of prohibited basis applicants is significantly lower than that group’s representation in the total population of the market area.”

TRUPOINT ViewpointOf course, understanding your market demographics is only one piece of the fair lending puzzle. The next step is comparing your market demographics to your internal lending patterns, which will help your organization understand and potentially mitigate fair lending risk. If you need help comparing and contrasting your market risks, please consider TRUPOINT for your analytics and compliance consulting needs.

Thanks again to Jerry Walker, Ron Shettlesworth and the passionate bankers from New Mexico for a great couple days in Ruidoso. It was a wonderful conference, and TRUPOINT was proud to share the stage with such an amazing line-up of speakers that included Susana Martinez (Governor of New Mexico) and Esther George (president and chief executive of the Federal Reserve Bank of Kansas City). Well done, New Mexico!

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