Assessing Fair Lending Risk
A current hot topic with examiners, Adam explains how a financial institution can assess fair lending risk. An article that relates to this video can be found at www.compliancecohort.com/blog/assessing-fair-lending-risk.
Video Transcript
The following is a transcript of this video.
Today we're talking about how to assess fair lending risk.
Fair lending is currently a hot topic with examiners as you know. It always has been and it always will be. But the interesting thing about fair lending today is the scrutiny from examiners is going to increase. It's already bad enough, but it's only going to get worse due to the Home Mortgage Disclosure Act rules that went into effect on January 1, 2018, as well as the rules that haven't even been written under the Dodd-Frank Act that are going to require financial institutions to report data on small business lending. So, this is causing a change in our fair lending landscape and the idea is now is the time for institutions like yourself to assess fair lending risk.
In order to assess fair lending risk, I believe there is a four-step process to do this. There's several things you can do.
First of all, we need to understand how the courts really work. Recognize discrimination. That's the very first thing. If we're going to try to figure out what we need to do, we need to look at what is expected of us. We do that through looking at how the courts recognize discrimination. The second thing is to evaluate our company's history of fair lending compliance. Whether or not we have a past history of violations or not. The third thing is to consider, internal factors, and the fourth thing is to consider external factors
So the first step in assessing fair lending risk is to understand how discrimination is recognized in the court. There's basically three ways. The first way that discrimination is recognized is called overt evidence of disparate treatment. Overt evidence of disparate treatment is what I call stupid comments. It's when lenders say things they shouldn't say or believe things they shouldn't say. For example, they say, “I will not lend to you because you're too old.” You can basically insert the protective class there. That is overt evidence. It's an obvious blatant discrimination.
The second type of discrimination is comparative evidence of disparate treatment. Comparative evidence of disparate treatment is a little bit trickier because it's when your examiners come in and they find a loan file that you have approved to a control group, like a white male, and they compare that to a very, very, very similar applicant, who may have had even better credit qualities, who happens to be a protected class. That is comparative evidence of disparate treatment and considered a discrimination.
The third type of discrimination recognized by the courts is called disparate impact and this almost always comes from a policy. All three of these types here that I'm talking about of discrimination I'm going to have separate videos on so you can look for those in the membership site on compliancecohort.com.
The second step in assessing fair lending risk is to evaluate the institution's history of fair lending compliance. Basically, what you want to do is to look at your past history and see if you have had a history of fair lending issues or you haven't.
So there's a couple things we're going to look at. We're going to look at exam findings. Did you have issues? Audit findings. Did you have issues? Do you have any internal monitoring that has caused problems? Or finally, well what kind of complaints have you gotten that relate to fair lending? This helps you understand your history and really weighs on your risk of fair lending violations going forward.
The third step in assessing fair lending risk is to consider internal factors. Internal factors include things like organization size and complexity. Or your policies and procedures - specifically, whether you have a lot of lender discretion; whether you allow for overrides, and what your exception process is like and how that is managed; whether or not you have a second review of denied loans; f you have any compensation agreements that can lead to a lender pushing one type of product that may discriminate against somebody. Finally, training is an internal factor that can make a difference when it comes to fair lending.
The fourth step and the final step in assessing fair lending risk is to look at external factors. There's a couple of things, externally, we can look at. First of all, we can look at customer demographics. There are some financial institutions I've been into in the rural Midwest where there just are not a lot of minorities so the risk of discrimination against a minority is probably reduced compared to those institutions who are located in a larger city. The second thing to look at when it comes to external factors is third-party relationships. This is a big one. This is things like your vendors, your brokers, and especially any indirect auto dealers you may have relationships with. All of these factors can increase your fair lending risk.
That's our video today on assessing fair lending risk.
