In today's compliance environment, having a robust fair lending compliance management program is critical. Fair Lending compliance is a regulatory focal point, and noncompliance can bring a host of regulatory enforcement actions, penalties, civil liability, and negative publicity.
Financial organizations, faced with the onslaught of changes, ambiguous regulatory guidance, and tight compliance budget, are overwhelmed with the pressure to keep up with continually evolving regulations.
Is your financial organization struggling with aligning their processes with the fair lending requirements? You know you've got to build a comprehensive Fair Lending compliance program for your financial institution. But building a program customized to accommodate your financial institution's unique products, programs, market, networks, and management structure can be tough.
The risks are high, guidance isn't always clear, and the requirements can be overwhelming. Where to start? Compliance Core can help you gain the insight you need to assess and manage compliance risk.
Keep reading, and we'll share some of the key factors you'll need to take into consideration as you draw up your fair lending compliance program plan.
5 Key Factors of a Fair Lending Compliance Management Program
Fair lending is the equitable and unbiased treatment of all customers when making credit-related decisions. Fair lending laws ensure that financial institutions provide fair and uniform services and credit decisions.
The federal fair lending laws—Equal Credit Opportunity Act (ECOA) and Fair Housing Act (FHA)—provide protections for transactions made with people or organizations that regularly extend credit. These laws prohibit discrimination in credit transactions, including any related to residential real estate transactions.
The Equal Credit Opportunity Act, under Title 15 of the U.S. Code, applies to credit transactions or extensions of credit. These transactions include residential real estate lending and extensions of credit to small businesses, corporations, partnerships, and trusts.
ECOA prohibits discrimination based on color or race, religion, national origin, sex, marital status, age, the applicant’s income received from any public assistance program, or the applicant’s good faith exercise of any right under the Consumer Credit Protection Act.
The Fair Housing Act applies to all aspects of residential real estate-related transactions. These include making loans to buy, build, repair, or improve, sell, or rent a dwelling. It also applies to purchasing real estate loans, appraising, brokering, or selling residential real estate.
The FHA prohibits discrimination based on race or color, religion, national origin, sex, familial status, or handicap. It requires lenders to make reasonable accommodations, if necessary, for a person with disabilities, to give the disabled person an equal opportunity to apply for credit.
Why is Fair Lending Compliance critical for financial organizations to get right?
The Federal Trade Commission rigorously enforces the fair lending laws, making fair lending compliance critical to financial institutions.
The scrutiny on discrimination and fair lending compliance has significantly increased, with regulatory agencies enforcing existing rules and enacting new regulations. To effectively implement fair lending requirements and protect against potential enforcement actions, financial institutions must implement a framework to apply lending standards consistently.
The regulatory agencies' fair lending examinations focus on the entire credit life cycle, starting with loan products' marketing, then through loss mitigation and collection practices. These examinations can result in steep penalties for any fair lending violation.
There is also a growing tendency for violations to be referred to the United States Department of Justice (DOJ), usually with allegations of ECOA violations with loan application denial or other discriminatory issues, such as pricing or credit score requirements.
It's not uncommon for a financial institution to be under simultaneous examination by more than one agency. It happens when the same violation is reported pursuant to different regulations. Many times, when regulatory agencies discover discrimination within an institution's lending process, there are violations of multiple rules as a result of the overlap and interplay of regulations implemented by the various regulatory oversight agencies.
Failure to comply with fair lending requirements may result in litigation, civil money penalties, and formal enforcement actions, harming the bank's reputation and requiring corrective action.
What is the most prominent thing banks get wrong when building a fair lending compliance program?
The most prominent thing banking organizations get wrong when building a fair lending compliance program is not performing a robust fair lending risk assessment.
A robust risk assessment helps reveal the most significant risks and provide critical information for a risk-based program's development and implementation. In conducting a fair lending risk assessment, banking organizations should consult the FFIEC's Interagency Fair Lending Examination Procedures and any supplemental materials from its regulator(s).
Banks should review their credit operations before building a fair lending compliance program or as part of their ongoing risk and control self-assessment program, including the types and terms of credit options offered, differentiating among broad categories of credit, such as residential, consumer, and commercial, and product alternatives within these categories (fixed vs. variable, etc.).
Banks should also review the volume or growth in lending for credit products offered, as well as any special purpose credit program or another program specifically designed to assist specific underserved populations.
Banks should also review the credit markets' demographics in which they are doing business and the organization of their credit decision-making process. This review needs to include the extent to which discretion in setting credit terms and conditions, or pricing, is delegated to various levels of managers, employees, or independent brokers or dealers.
Banks should also review their loan officer compensation program.
The following are the key considerations your organization should make in building a fair lending compliance management program.
1. Fair Lending Compliance Training
The organization must provide fair lending compliance training to employees, management, and board members. You should make sure that training outlines policies for declining and file documentation requirements. Consider supplementing fair lending training with sensitivity training to help prevent discrimination by employees.
You should clearly outline all of the fair lending laws, explain the different types of discrimination, and include examples of both good and bad practices. Answer any employee questions, so the points are clear to everyone.
2. Consumer Complaint Management
Consumer complaint monitoring helps institutions proactively identify consumer harm risks, compliance management program deficiencies, and customer service issues. Complaints can serve as indicators of possible weaknesses in processes, training, and controls.
High-risk complaints are complaints that allege discrimination or another legal violation, and complaints that could damage the company’s reputation, ability to do business, or bottom line. Pay attention to those that allege discrimination or other Fair Lending violations, either submitted directly to the institution or third-parties (e.g., CFPB).
Your institution needs to have clear processes and procedures for responding to consumer complaints. This clarity will help everyone inside your company to be successful and limit the potential compliance risks related to handling complaints.
3. Fair Lending Compliance Monitoring
Building a healthy fair lending monitoring system ensures compliance with policies in practice. Monitoring and self-testing may include the use of metrics, regular data analysis, policy reviews, exception management reviews, internal risk assessments, and more. Your monitoring program will depend on your organization's size and complexity.
If your monitoring reveals a fair lending concern, it's important to document how you remediated that concern. Document all of your remediation efforts to demonstrate what was done and when it was done. An un-remediated identified risk is worse than an unknown risk. An unidentified risk is a weakness in your monitoring program (which, although problematic, can be enhanced). Un-remediated risks show a disregard for identified problems (perhaps even an unwillingness to do the right thing).
4. Independent Auditing
An independent audit is an in-depth review of the adequacy of the design and operating effectiveness of your compliance program by an impartial third party. This may be accomplished through your internal audit unit or a third-party service provider. Audits provide a clear-eyed perspective on, and reasonable assurance of, your institution's risk management design and performance.
Independent compliance audits evaluate the strength and comprehensiveness of your organization's compliance policies and risk management procedures. They help you identify gaps, provide recommendations on improvements or corrective actions, and help prevent future deficiencies or nonconformities.
Your fair lending compliance audit function needs to be genuinely independent of your compliance function. At Compliance Core, we can independently audit your company in advance of a regulatory exam, so you can have peace of mind when your examination comes around.
5. Third-Party Vendor Risk Management
For many organizations, third-party vendors have become an essential source of business value and strategic advantage. But third-party relationships present their own set of risks, such as cybersecurity and other risks. Financial institutions need to effectively reduce the possibility of data breaches, costly operational failures, vendor bankruptcy, and meet regulatory requirements.
Organizations are required to manage third-party vendors. Regulators will review activities conducted through third-party relationships as if the institution itself were performing them.
At Compliance Core, we manage all facets of enterprise compliance and risk management, including fair lending compliance, and are well-equipped to serve as your risk management partner. Our website offers a free quiz that will help you determine your compliance and risk management program's maturity. Click below to learn more. How Mature is Your Risk Management and Compliance Program?