Are You Ready for a Fair Lending Review?

Introduction

You have just received the news; as part of the upcoming compliance examination, the regulators will be performing a fair lending review.  No problem, right?  Well, maybe just a slight problem; such as you have NO IDEA what a fair lending review is and what it will take to pass!   Well, fear not, there are some quick diagnostics that you can use to determine how bad it might be!  

First Things First

There is no one fair lending law or regulation.  In fact, there are several laws and regulations that come together to make up the components of a fair lending examination.  These laws and rules include:

·         Regulation B (Equal Credit Opportunity)

·         Regulation Z (Advertising)

·         Regulation DD (Advertising)  

·         UDAAP  (Unfair Deceptive Abusive Practices)

·         The Community Reinvestment Act

·         Individual State laws

The examiners will use a combination of these rules and laws to make an overall determination about your Bank’s compliance with Fair Lending. 

A Quick Check up

If you have not already done so, now is a good time to ask yourself a series of questions that should help you determine your overall level of readiness for the Fair Lending examination

1.       Has your credit policy been reviewed and approved by the Board in the Last 12 Months?  If the answer to this question is no, there are potential fair lending problems.  One of the things that examiners will review is whether or not the Board keeps its credit policies up to date and in tune with the values of the Board.  In addition, the credit policy should reflect  the goals in the Bank’s strategic plan

2.       Is there a secondary review process for credit decisions?  Examiners will review the process by which credit decision receive a secondary opinion.  In particular, the examiner will want to make sure that there is documentation of exceptions to policy and a more intense review of loan decisions that are “close calls”.  The lack of a secondary review process can, and often does, lead to a negative finding.  

3.       Does Your Advertising Use People as subjects?  Many of our banks use testimonials of customers in their advertisements.  And while this is an effective means of advertising, it is also fraught with danger!  If your bank uses advertising that includes pictures of people, then the pictures should reflect the diversity of the surrounding community.  Anything less could be seen as discouragement for the groups of people who are not represented in the advertisements. 

4.       Does your Compliance Department Test Adverse Actions for Reg. B?  Adverse actions notices will always be tested in a fair lending examination.  Many of the tests in this area are subtle and require experience.  For example, when a loan is closed for lack of sufficient information, examiners may review approved loans that took significant time to close and compare the efforts that the loan staff put forth in both cases to ensure that discouragement did not take place. 

5.       Does your Bank keep a record of exceptions to policy for loans?  One of the key areas that will be reviewed in a fair lending examination is the Bank’s review and documentation of exceptions to loan policy.  All banks make exceptions, but documenting the business reasons for the exception is critical.  Without clear records of the reasons for exceptions that Board will be left to try to explain similarly situated borrowers that had divergent loan results. 

6.       Does your bank have a well-defined process for tracking and responding to complaints?    Consumer complaints are an invaluable source of feedback from your local assessment area.  By making sure that each compliant is researched and receives a response, a Bank can get a clear picture of how it is perceived in its community and can address what often times are misunderstandings.  This has become an area of focus in recent consumer examinations.  

7.       Has there been fair lending training for all staff that has direct public contact in the last 12 months?  Since fair lending is a topic that is complex and subtle, it is a best practice to ensure that all staff that have contact with the public receive at least a refresher course on an annual basis. 

8.       Has anyone at the Bank done a periodic comparison of loans granted versus declined?  One of the most important and potentially devastating reviews that examiners can perform during a fair lending audit is a regression analysis of similarly situated approved versus declined loans.   It is an excellent idea to have the compliance department compared declined to approve loans on a regular basis to ensure that there is symmetry in credit decisions.

9.       Has the credit scoring system been independently tested for validity?  Most of our banks used an established credit scoring system which is good for consistency sake.  However, it is a best practice to ensure that the credit scoring system is periodically validated.  Many banks forget to ask for information about validation of the system.  Often times, examiners ask for this information. 

10.   Is there a process for reviewing the Bank's outreach to its local community?   As part of the ongoing marketing or CRA program, does the Bank make a point of identifying the various members of its community and make an effort at outreach?   Is there a local Hispanic chamber of commerce or other special interest group within the assessment area?   If so, does the Bank make an effort to reach out to these groups? 

Are you ready?

The preceding list is not all inclusive, but in getting the answers to these questions, you can start to understand whether or not you are ready for an upcoming Fair Lending examination