Fair Lending- A Silent Killer?  - Part Two- A Proactive Approach. 

There’s No getting around it!  

In our previous post we discussed the idea that certain aspects of fair lending laws and obligations will apply to your bank no matter the size or the character of the products offered.  Even if your bank focuses almost entirely on commercial lending and is a small community bank, fair lending must be a consideration for your management.   This is true because the Equal Credit Opportunity Act, the Community Reinvestment Act and the Flood Insurance rules apply to all banks.  In addition, we noted that regulators are expanding the purview of the Unfair Deceptive Acts or Practices Act.  Finally we noted that HMDA often applies to commercial banks through their apartment lending activity.  The point is that fair lending cannot and should not be ignored.  

We further established that now is the time to start getting ready for the significant changes that are coming to the way data is collected.   We believe that section 1071 of Regulation B will represent a significant change in the way that data is collected and reported for community banks.  While this change in the way the information is recorded will be the future, it is also clear that influential regulators such as the CFPB look upon this section of the regulation favorable and will eventually implement this regulation.  

Change Creates Opportunity 

Even though the changes that are coming will require significant alteration of the loan application processes, we see an opportunity.  First, the type of information that will be required can be useful for planning and marketing purposes.  

 The list of information that we know will be required includes the following: 

I.                    ‘(1) IN GENERAL.—each financial institution shall compile and maintain, in accordance with regulations of the Bureau, a record of the information provided by any loan applicant pursuant to a request under subsection (b).

‘‘(2) ITEMIZATION.—Information compiled and maintained under paragraph (1) shall be itemized in order to clearly and conspicuously disclose—

‘‘(A) the number of the application and the date on which the application was received;

‘‘(B) the type and purpose of the loan or other credit being applied for;

‘‘(C) the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;

‘‘(D) the type of action taken with respect to such application, and the date of such action;

‘‘(E) the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant;

‘‘(F) the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;

‘‘(G) the race, sex, and ethnicity of the principal owners of the business; and

‘‘(H) any additional data that the Bureau determines would aid in fulfilling the purposes of this section.

‘‘(3) NO PERSONALLY IDENTIFIABLE INFORMATION.—In compiling and maintaining any record of information under this section, a financial institution may not include in such record the name, specific address (other than the census tract required under paragraph (1)(E)), telephone number, electronic mail address, or any other personally identifiable information concerning any individual who is, or is connected with, the women owned, minority-owned, or small business loan applicant.[1]

 As you can see, the type of information that will be required is extensive.  It is also worth noting that this information could go a long way toward helping your bank completely analyze how it is meeting the credit needs of the community and to plan accordingly.  

A Proactive Approach

When considering both the omnipresent nature and the impending growth of fair lending, we believe that a proactive approach is the best manner to proceed.  Such an approach can start immediately and can be enhanced incrementally without significant drain on current resources.   The starting point is an assessment.  

The fair lending risk assessment of your banks should be comprehensive and multi-dimensional; fair lending reviews touch several areas of your bank.   A thorough fair lending risk assessment can and probably should, include information from other areas such as:

·         The compliance risk assessment

·         The strategic plan

·         Enterprise wide risk assessment

·         Community Reinvestment Act   assessment

For fair lending, the focus of the assessment should be on how all of the operating areas of the bank impact the surrounding community.  For example, it is important to consider how the lending program meets the needs of the community.   Simultaneously, one should consider how deposit products that are being offered meet those same needs.  Has there been outreach to the local community to determine whether the products being offered by the bank are a good fit for the entire bank’s population?  The fair lending assessment should be completed at least annually.  For many banks, the overall resources available to the compliance department are limited.  Performing a comprehensive review of fair lending may seem like a low priority item.  However, by leveraging the information form other assessments and reviews that are regularly performed, this task can be completed seamlessly.  

Who Are You? 

For many banks, the question “how do you meet the credit needs of your community”? - can be a real stumper!  Most can answer in very general terms, but if pressed by a regulator, specifics would be difficult to present.   In the near future, this will be a significant question that must be answered with details.  A proactive approach to fair lending would include ongoing and dynamic research into the credit needs of the community.  There is significant public information available about the economic conditions in your local community.  Maintaining an active file that details statistics such as the median income and house price in your assessment area is critical.   Moreover, using this information to develop a set of answers to the question of meeting credit needs will serve your bank well. 

How are You Doing? 

There has been an increasing amount of attention on consumer complaints.   A best practice is to keep a complete records of complaints and how they were resolved and to report these results to the Board on a regular basis.  Regulators expect that complaints form customers will be taken seriously and addressed as a part of an overall fair lending effort.  Along these lines, the use of “mystery shoppers” to test the overall customer experiences is an excellent proactive approach.  

The Cutting Edge

The law already allows a bank to conduct a self-assessment of it compliance with the Equal Credit Opportunity Act (Reg. B.).  Specifically, 202.15 allows for the fact that a self-test for compliance is both encouraged and privileged information.   Put another way, by using the self-testing provision of Regulation B, you bank can start collecting all of the above information now.  Information about who your commercial borrowers are and what characteristics they do and don’t have is invaluable information.  It is also information that will eventually be required, so why not start today? 

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[1] 5 U.S. Code § 1691c-2