Fair Lending Risk Assessments

Does your Fair Lending program need a tune-up?

Fair lending violations are costly and embarrassing for financial institutions and pose an extreme risk if not appropriately managed. It was recently announced* that the OCC assessed a civil money penalty of $3 million against a bank related to a “redlining” discrimination case. In addition, the settlement requires the bank invest:

• $4.17 million in a loan subsidy fund for residents of predominantly Black and Hispanic neighborhoods,

• $750,000 for development of community partnerships to provide services that increase access to residential mortgage credit in those neighborhoods, and

• at least $625,000 for advertising, outreach, consumer financial education, and credit repair initiatives.

The bank must also dedicate at least four mortgage loan officers to majority-Black and Hispanic neighborhoods and open a new branch in one of those neighborhoods. And finally, the bank must hire a director of community lending and development who will oversee these efforts.

The issues that were cited against the bank were:

• The Bank’s pattern of mortgage application and origination activity was statistically significantly lower than the lending activity of its peers in majority-minority census tracts and majority-Hispanic census tracts,

• Branches were concentrated in majority-white neighborhoods,

• Loan officers did not serve the credit needs of majority-Black and Hispanic neighborhoods, and

• The bank’s outreach and marketing avoided those neighborhoods.

All this could have been avoided. A Fair Lending Risk assessment will capture these items and is a critical component of any solid CMS program and must get conducted annually. The results of this risk assessment process should then be distributed amongst the appropriate stakeholders and senior management of the institution and presented and discussed during a formal fair lending committee meeting (Note: The Board of Directors /Trustees should also get regular updates of the institutions fair lending risk status).

It is critically important that the institution document any weaknesses identified during a fair lending risk assessment process. Also, activities that are designed to improve performance also need to get clearly documented on an issue resolution tracking report. These efforts go a long way during the examination process to prove the institution is not discriminating on any prohibited basis and that the bank is making every good faith effort to improve its performance when deficiencies are identified.

The basic core starting point for any fair lending risk assessment should contain (at a minimum) all “Discrimination Risk Factors” outlined in the FFIEC Interagency Fair Lending Examination Procedures. The categories identified in the exam procedures are:

• Compliance Program (Structure and Management, Supervisory History)

• Overt indicators of discrimination

• Underwriting

• Pricing

• Steering

• Marketing

• Redlining

The primary focus of the Fair Lending Risk Assessment should identify all weaknesses as it relates to fair lending and have those items clearly documented and the steps to be taken to mitigate any outstanding residual risk.

It cannot be overstated how vitally important doing a fair lending risk assessment is and understanding what your lending data, marketing outreach efforts, policies and procedures, and training are indicating for risk.

Let's just take a quick look at branches for example as this was something cited as indicating evidence of discrimination in the case cited above. Have you done analysis of where your branches are located and is their distribution relative to the demographics of your market area? Do you employ loan officers that reflect the diversity of the community that you are operating in? And if you don’t have a diverse composition of loan officers, do you at least have HR objectives to hire minorities and women and can demonstrate this effort to the examiners and you simply have not received qualified applicants? Even if you do have branches in majority minority census tracks, do services or hours of operation differ in those branches? If the hours of operation differ by branch location, this can elevate fair lending risk because you're limiting access to your products and services and if there's a negative impact on an area you're serving that is a majority minority area, that’s a fair lending risk factor. Are loan originators only assigned to primarily white census track branches and there are no loan originators operating out of the majority minority census tract branches? These are just a few examples of things a fair lending risk assessment should be quantifying and this performance by itself is not discrimination per se, but it's a piece of what gets cited as evidence of possible discriminatory activities.

SCA’s team of compliance experts assist our clients with successfully managing their compliance risk and can tailor an engagement to review your fair lending program. SCA’s team of compliance experts have a vast level of knowledge and experience in Fair Lending compliance and are ready to assist and prepare you for your next exam.                                       .                                                     

For a free consultation to discuss a review of your fair lending risk status, contact Bill Dolan, Director at (617) 694-2617 or visit our website at: www.scapartnering.com to learn more about SCA’s consulting services.

* https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-87.html