kybanks.com
COMPLIANCE CORNER
by Timothy A. Schenk KBA Assistant General Counsel tschenk@kybanks.com
FAIR LENDING
The Challenge of Meeting Regulatory Change On March 16, the Consumer Financial Protection Bureau (CFPB) “announced changes to its supervisory operations to better protect families and communities from illegal discrimination.” “The CFPB will scrutinize discriminatory conduct that violates the federal prohibition against unfair practices. The CFPB will closely examine financial institutions’ decision-making in advertising, pricing, and other areas to ensure that companies are appropriately testing for and eliminating illegal discrimination.” While these announcements from the CFPB, and many other agencies, are not new, the question remains, what is “fair lending”? Practitioners can look to laws like the Equal Credit Opportunity Act (ECOA), Consumer Financial Protection Act (CFPA), Home Mortgage Disclosure Act (HMDA), Fair Housing Act (FHA), the Real Estate Settlement Practices Act (RESPA) and others for direction. In reality, however, these laws generally only provide a baseline standard that tells what is not fair lending; not “what is fair lending.” When you talk to regulators and regulatory experts, most say, “You will know a fair lending violation when you see it” and it is not fair lending if your practices have a “disparate impact.” That doesn’t really provide clear guidance which we look for as practitioners. Furthermore, the regulatory enforcement action database generally only tells us the worst of the worst with acts of clear discrimination and redlining that leaves out real guidance for those institutions working to implement a robust compliance management system. The reality is that banks must be proactive in utilizing every tool at their disposal to ensure fair lending. This includes understanding that review is not just at consummation at the loan; but rather throughout “the life” of the loan. In reviewing loan practices at the time of consummation or “front end,” there are a number of areas to review for compliance. This includes reviewing the numbers of applications and approvals in low-to-moderate income areas. It includes ensuring that your marketing targets everyone in your service area, not just specific income levels and that your strategy is understandable to all people, including those individuals with English as their second language. This also includes reviewing loan policies to ensure your underwriting policies are non-discriminatory and that your employees fully understand the policy. A compliant fair lending program avoids minimum loan amounts and programs that may have unintended negative consequences. For loans in default, the CFPB and other regulators expect banks to have resources to respond to requests and applications for loss mitigation assistance to reduce “avoidable” foreclosure. These action
items include: being proactive; working with borrowers; addressing language access; evaluating income fairly; handling inquiries fairly; preventing avoidable foreclosures; and using all tools to communicate with borrowers within legal confines. Regardless of whether you are viewing fair lending at the beginning, middle or end of a loan, the key to a successful fair lending management system is to analyze data and document your actions. In order to be successful at fair lending, an institution must implement a system of oversight and accountability. One expert that I talk to regularly working with banks in the regulatory process always says, “You tell your story. Do not let a newspaper tell it for you.” “Telling your own story” is a process. This means instituting a robust compliance management system that can monitor loan processing and underwriting activities for compliance and issue reports related to compliance. Your compliance management system should test, monitor and audit your loan activities and be able to conduct a comparative analysis for peer groups within similar markets. Your compliance management system should be able to identity disparities between groups in key-lending metrics. If you see disparities, determine whether that disparity equates to discrimination and if so, determine what you will do to remedy it. By addressing all of these areas prior to examination, you can explain any differences and show how you are taking steps to ensure that your institution is fair lending compliant. It is also important to understand the systems implemented to protect your institution. You have three lines of defense: (1) your front-line business unit and partners; (2) your compliance risk management system and compliance department; and (3) your internal and external audits. Fair lending is making sure that problems areas do not make it through the first line of defense, but certainly not all three lines of defense. While these lines of defense can seem burdensome, they will protect your institution from fair lending risk and ensure a culture of fair lending compliance. The reality is that all banks face ever-changing fair lending risk. Asset size does not matter when it comes to enforcement. All agencies are expected to issue new regulations and enforcement items related to fair lending. While we expect regulatory enforcement to increase, we do not expect new guidance directing banks how to lend and further defining “fair lending”. This can be challenging for banks. However, if you properly analyze your data and focus on your three lines of defense, you are likely to be deemed a fair lender regardless of what definition of “fair lending” is being utilized.
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