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.
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.
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The FFIEC’s recommendations for effective risk management for consumer protection focuses on three key areas: sustainability, accuracy, and consistency.
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.
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:
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.
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.