Fair lending compliance is a crucial concern for financial institutions today. It’s essential for your organization to have a comprehensive understanding of its exposure to fair lending risks.

Regulatory bodies across the financial sector are placing increased emphasis on fair lending practices. This includes guidance from major oversight agencies, policy statements from credit union regulators, and advisories on equal credit opportunity from consumer protection bureaus. Additionally, the Department of Justice has launched initiatives focused on fair lending.

Although navigating fair lending compliance can be challenging, gaining a clearer picture of your risk exposure can significantly streamline the process.

Key points to remember about fair lending:

• It encompasses all stages of the credit process, from initial marketing to ongoing servicing.
• It applies to all loan types, not just those reported under specific regulations.
• All staff members have a responsibility to support fair lending efforts, regardless of their official compliance roles.

 Seven primary areas of fair lending risk:

1. Compliance Management Program Effectiveness

Is your fair lending compliance program robust enough to manage risks effectively? The program’s strength should match your institution’s risk profile.

2. Redlining Risk

This remains a significant regulatory focus. Understanding your institution’s risk in this area is crucial in the current regulatory climate.

Here are 7 key points to check for redlining risk:

• Review Geocoded Lending Data
  Look for lending patterns in your data. If your lending activity forms a “C” or “O” shape in certain areas, it could signal redlining risk. These patterns might catch regulators’ attention.
• Evaluate Marketing Risk
  Ensure your marketing reaches all communities by analyzing applications from minority census tracts, distribution within your market, and your market share.
• Check Underwriting Risk
  To prevent redlining, review your loan originations in majority-minority areas, distribution, and market share to ensure you’re serving all communities.
• Assess Reverse Redlining Risk
  Watch for concentration of higher-cost products in minority or LMI areas. Analyze applications and originations to ensure fair treatment.
• Compare Performance to Peers
  Benchmark your marketing, underwriting, and reverse redlining risk against competitors. If your disparities are smaller, this could help with regulatory reviews.
• Assess Branch and ATM Network Changes
  Changes in branches or ATMs, such as hours or services offered, could affect your redlining risk, so regularly evaluate their impact on all communities.
• Review Fair Lending and CRA Data
  Regulators use HMDA and Census data to assess redlining risk. Regularly review this data and compare it to peers to stay compliant.

3. Marketing Practices 

Ensure your marketing efforts reach all segments of your market equally. Consider whether your application demographics align with your market’s overall demographics.

4. Steering Risks 

Evaluate whether similar applicants receive consistent treatment across product lines. Data analysis can help identify any disparities in product recommendations.

5. Underwriting 

This is a key risk area. Analyze approval and denial rates, and scrutinize any subjective criteria in your underwriting process that could lead to inconsistencies.

6. Pricing

Examine whether comparable applicants receive similar pricing. Look for patterns in rate spreads and overall pricing structures.

7. Servicing 

Consumer complaints during servicing can attract regulatory attention. Ensure consistent treatment in areas like loss mitigation options, processing times, and collection practices.

Remember, your institution remains responsible for fair lending compliance even if servicing is outsourced. Working with a reliable fair lending compliance software provider like Ncontracts is a good choice for the future of your financial institution. 

Regulatory focus on fair lending is intensifying. It’s crucial for financial institutions to be aware of and actively manage their fair lending risks.

Published By: Aize Perez