Financial institutions have been working with borrowers struggling as a result of the COVID-19 pandemic. From deferrals and partial payments to forbearance, borrowers across the country have sought and received loan accommodations.
Many of these accommodations were intended to be short-lived—including CARES Act provisions that provided mortgage forbearance and a moratorium on foreclosures for federally backed mortgages. Yet the economic devastation caused by COVID-19 continues.
Now with many of these initial accommodations coming to an end, it raises an important question: What should financial institutions do?
The answer comes down to risk management, finding a way to balance the needs of borrowers with safe and sound credit practices—including Fair Lending compliance.
FFIEC Talks Risk Management
As loans reach the end of their relief period, FIs need to revisit accommodations, deciding whether or not it’s necessary or feasible to provide borrowers with additional accommodations, have them pay the deferred amount, or change the loan agreement to make it sustainable and affordable for the long term.
That’s the message coming from the members of the Federal Financial Institutions Examination Council (FFIEC), including the Fed, FDIC, OCC, NCUA and CFPB.
The FFIEC has offered up risk management and consumer protection principles for FIs to consider when balancing the needs of borrowers with the safety and soundness of FIs’ credit practices. This includes consumer and business loans as well as both revolving and open-end credit products.
While FIs will naturally be focused on credit risk and accounting, that’s not the only area where FIs need to identify, measure, and monitor risk. Consumer protection and internal controls also should be top of mind, the FFIEC says.
Related: 5 Steps for Easing into ERM
Risk Management Tip #1: Keep Your Eye on Consumer Protection
The FFIEC’s recommendations for effective risk management for consumer protection focuses on three key areas: sustainability, accuracy, and consistency.
- Options need to be affordable for the long-term, and both the FI and the customer need enough time to work out the details before the accommodation ends.
- All disclosures and communications need to be clear, accurate, and arrive before the end of the accommodation.
- Policies and procedures should document what qualifications borrowers will need to meet to be eligible for further accommodations and what those payment terms will look like. Consistency is key, particularly when it comes to Fair Lending. An FI needs to be able to ensure that similarly situated borrowers are treated the same.
The FFIEC specifically mentions applicable laws including, the Equal Credit Opportunity Act (ECOA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), the Fair Housing Act, prohibitions against unfair or deceptive acts or practices (UDAP) (such as section 5 of the Federal Trade Commission Act), the Real Estate Settlement Procedures Act (RESPA), the Servicemembers Civil Relief Act (SCRA), the Truth in Lending Act (TILA), and the regulations issued pursuant to those laws.
Are Your Written Lending Policies Keeping Pace with the Economic Environment?
Risk Management Tip #2: Test Internal Controls
You can expect loan accommodations to be a high-profile issue come exam time. As always, examiners will want to see more than clear policies and procedures. They will want to see proof that they were effective. This includes everywhere from quality assurance and operational risk management to compliance and internal audit.
The FFIEC emphasizes the importance of targeted testing for managing each stage of an accommodation to ensure:
- The approval process is followed, and risk ratings are appropriate.
- Options are presented in a fair and consistent manner that comply with laws (including Fair Lending).
- Communications are clear, timely, and accurate.
- Financial information is accurately calculated and reported.
- The staff understands the process and can handle the workload.
Risk monitoring, audit, and consumer complaint systems should be designed to assess compliance with both internal policies and procedures as well as applicable laws and regulations.
Related: Creating Reliable Risk Assessments
Risk Management Tip #3: Fair Lending is Part of a Strong Risk Management Program
The FFIEC’s risk management principles are not new. They reflect best practices for risk management, including Fair Lending.
But they do remind us what the regulatory agencies will be looking for when they look at your FI’s loan accommodation process. FIs have been encouraged to prudently work with borrowers. The FFIEC’s joint statement demonstrates what, exactly, prudent means.
In the case of Fair Lending, it means testing internal controls to ensure similarly situated borrowers are offered similar options and opportunities for loan accommodations. Are your Fair Lending controls working?
Being able to continuously monitor potential risks, including Fair Lending risk, is an important part of a strong enterprise risk management program.
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Covid-19 Risk Management: Balancing CRA & Fair Lending
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