Fair Lending Risk Assessment

Senior Leadership
Fair Lending Training
Fair Lending - Course Objectives
This course is designed to help the Board of
• Grasp the legal foundation for fair lending
• Understand the source of fair lending risk in the
bank’s business operations;
• Expect management to be SMAART about
managing fair lending risk; and
• Assure that Board expectations for compliance
accountability are being reflected in audited
Fair Lending Legal Foundations - In a Nutshell
What is fair lending and how does it apply to the Bank’s
Fair lending is the consistent, objective and unbiased treatment of
all consumers without regard to any basis prohibited by law (e.g.,
race, color, religion, national origin, sex, age, marital status, etc.)
Fair lending laws and regulations apply to all credit products and
credit-related services for both consumer and business purposes.
Fair lending obligations apply to all aspects of your credit
transactions including marketing, application, underwriting, pricing,
servicing and collections.
Fair lending is fundamentally the application of objective, safe and
sound lending criteria to similarly situated people similarly;
thereby avoiding any differential treatment of your customers that varies
by a prohibited basis.
Fair Lending Legal Foundations - Basic Laws
Two primary laws govern fair lending practices:
Equal Credit Opportunity Act (ECOA) / Regulation B
ECOA, enacted in 1974, prohibits discrimination based on race,
color, religion, national origin, sex, marital status, age, source of
income, or whether a person exercises rights granted under the
Consumer Credit Protection Act for any credit transaction.
Fair Housing Act (FHA)
The Fair Housing Act is part of the Civil Rights Act of 1968.
The FHA makes it unlawful for any lender to discriminate in
housing-related lending activities against any persons because of
their race, color, religion, national origin, handicap, family status,
or sex.
NOTE: State or local laws may include additional prohibited bases,
such as sexual orientation.
Fair Lending Legal Foundations - Related Laws
Home Mortgage Disclosure Act (HMDA) / Regulation C
HMDA requires certain recordkeeping and reporting to be performed
in connection with home purchase and home improvement loans.
Regulators use the data to assist in evaluating lender compliance
with anti-discrimination laws and other consumer protection laws.
Community Reinvestment Act (CRA) / Regulation BB
Rather than specifically prohibiting discrimination, the CRA
encourages institutions to help meet the credit needs of the
communities which they serve. A poor fair lending record can
negatively impact a CRA rating and can result in the denial of
applications to open a branch, relocate an office, or acquire another
financial institution.
Fair Lending Practices - Scope of Requirements
Although regulators have traditionally focused on lending areas that
permit human judgment (e.g., underwriting and pricing), fair lending
requirements apply to the entire credit administration process,
New product development
Advertising and marketing
Taking applications
Processing applications
Credit risk and underwriting
Account servicing activities
Collections and loss mitigation
Fair Lending Legal Foundations--Risk Types
Non-compliance with fair lending laws presents several risks
to financial institutions.
• Regulatory risks: Adverse examination findings and
supervisory corrective action.
• Litigation risks: Private and governmental lawsuits.
• Reputational risks: Tarnished public image and lost
franchise value.
Sources of Fair Lending Risk - Market Strategy
Strategically limiting your retail credit footprint other
than due to your business capability for lending risks
refusing loans to qualified borrowers in a particular
geographic market that varies by the prohibited bases
characteristics of the residents: possible redlining.
Manage this risk in the product development stage by projecting how
your footprint will impact geographic areas delineated by the
characteristics of the residents and continue to monitor your marketing
efforts and loan production results as lending activity grows.
As you plan your business development anticipate its impact and
monitor market penetration when executing your strategy.
Sources of Fair Lending Risk - Market Strategy
Promoting different programs within a loan type risks
steering otherwise qualified borrowers to a program
with less favorable terms or conditions in a way that
treats them differently due to a prohibited basis.
Manage this risk by adhering to program standards and training staff
against sales practices that may depend on pre-judgments or stereotypes and monitor the resulting distribution of applicants and
borrowers across your different programs.
Use diverse options to tailor credit solutions to better serve the
range of qualifications of a diverse community.
Sources of Fair Lending Risk - Lending Discretion
Discretion in underwriting or pricing risks loans being
denied or priced in ways that end up varying by the
applicant’s prohibited basis characteristic.
Banks can manage this risk by insisting that originators document the
objective basis for their judgments and then monitor the consistency of
loan production decisions.
Discretion in processing loans can result in poor
treatment that discourages applicants discriminatorily.
Manage this risk by training staff to assist all applicants similarly in
helping them complete the process and monitor the quality and duration
of applicant processing and evaluate reasons why applicants withdraw.
Today’s deserving applicants are tomorrow’s good customers.
Sources of Fair Lending Risk - Lending Exceptions
Allowing exceptions to your objective standards for
underwriting or pricing a loan risks loans being
accepted, denied or priced in ways that over time end
up varying by the applicant’s prohibited basis
Banks can manage this risk by documenting the objective basis for
exceptions and then monitor the exceptions and the reasons for them
to ensure all applicants similarly situated with those receiving favorable
exceptions are receiving similar favorable treatment. Conduct
monitoring for those adversely effected by exceptions too.
Board members in banks often exercise exception authority and
need to be vigilant about consistency when they do.
Sources of Fair Lending Risk - Third-Parties
Delivery channels like wholesale mortgage operations or
indirect auto loan programs expose the bank to the risk
that credit judgments of third-parties may result in loan
qualification and loan terms varying by the prohibited
bases characteristics of applicants.
Manage such third party operations by expecting each to abide by fair
lending requirements and monitor how loan production meets standards
both individually and across your channels’ aggregate experience.
Control for risks from relying on third-parties involved in
any part of your lending operations.
Understand your business partners’ and agents’ compliance track record
and evaluate their performance in serving your needs against your fair
lending standards.
Be SMAART about Fair Lending
Components of a comprehensive
compliance management program
SMAART Governance Questions
Systems = Are procedures in place to assure
products are delivered as intended and
recorded as necessary?
Monitoring = How are people/processes
supervised to maintain consistency?
Assessment = How do you check performance
results and assess risk?
SMAART Governance Questions
Accountability = How do you apportion and
assure responsibility for achieving expectations
Response = How are problems corrected?
Training = How is information communicated
and expertise maintained?
Fair Lending Objectives - Setting Expectations
• A SMAART compliance program (implementing your culture, controls
and communications) should mitigate your risk profile so that the
resulting risk exposure achieves your fair lending objectives set in
accordance with your tolerance for risk of damage to your bank and
your customers.
Risk profile + SMAART = risk exposure
Risk exposure =?= risk tolerance
Risk tolerance = fair lending objectives
Fair lending objectives = law abidance under
conditions of uncertainty
What are your bank’s fair lending objectives and how are they articulated so
management and staff can understand and fulfill them?
Appendix A--Fair Lending Policy
Appendix B--Fair Lending Risk Assessment

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