What is a Fair Lending Compliance Management System (CMS)?
Preventing and detecting discrimination with an active fair lending (sometimes referred to as Safe and Responsible Lending) compliance management system is essential for all financial institutions (FIs). FIs don’t just have a moral obligation to prevent and detect discrimination—they also have a legal obligation. Lending practices or programs that negatively impact a protected class can result in fines or enforcement actions—even if the discrimination was unintentional.
Fair lending has been a hot button regulatory issue for years, a trend that is expected to accelerate under the administration of President Biden. Now is the time for institutions to strengthen fair lending compliance management system (CMS) components, including fair lending programs that ensure compliance.
Related: What is Fair Lending Discrimination?
What is the difference between a fair lending CMS and a fair lending program?
A fair lending CMS is like an umbrella. It represents a system by which the entire FI, from the board of directors to auditors, has a role to play in trying to keep the institution protected from a storm. Unlike an institution's existing compliance management system, which tends to be general in nature, a fair lending CMS is hyper-focused on:
- Helping the institution and its management understand fair lending risk
- Creating awareness of how regulatory changes affect lending operations
- Ensuring the FI is equipped to engage in responsible lending practices and behaviors
What do examiners look for during a fair lending compliance exam? The CFPB examination manual breaks down the components of the CMS as they apply to fair lending. They include:
- A fair lending committee or other oversight governing body dedicated to fair lending issues
- Dedicated resources to oversee fair lending such as a fair lending officer or other person/department responsible for day-to-day fair lending compliance
- Up-to-date guidelines, policies, procedures, and standards for fair lending compliance monitoring
- The appropriateness of lending training including frequency, who participates, subject matter covered, and whether it includes recent changes in fair lending law and supervisory guidance
A fair lending program, on the other hand, is a subcomponent of the fair lending CMS focused on the controls that assist the institution in staying compliant, such as:
- Policies and procedures
- Monitoring and corrective action
- Consumer complaint response program
- Compliance audit
- Third-party service provider oversight
When examining an institution for fair lending compliance, examiners will rate the effectiveness of the overall fair lending CMS by reviewing whether the institution understands fair lending risk and has the appropriate controls to mitigate the risk effectively.
Remember, a fair lending CMS is more than just a way to check off an examination requirement. If crafted correctly, a strong fair lending program coupled with appropriate oversight can help your institution avoid multi-million-dollar penalties and reputational issues.
Want to learn more about uncovering fair lending risk? Our whitepaper Uncovering Fair Lending Risk to Build a Stronger Fair Lending Program has insights into analyzing fair lending risk, implementing appropriate controls, and enhancing their overall fair lending program at a time of increased government and public scrutiny.