We recently heard a credit union CEO say: “We are a credit union. We wouldn’t hurt our members, so we don’t have to worry about fair lending.”
That’s not the first time we’ve heard it – and it’s worrisome. The National Credit Union Administration (NCUA), Consumer Financial Protection Bureau (CFPB), and Department of Justice (DOJ) are telling a much different story, and everyone needs to listen.
Even NCUA Chairman Todd Harper said in February 2024, “There is this myth within the credit union system that because credit unions are owned by their members, they’re always going to do right by their members.” We’ve been hearing his warnings for years, and now we are starting to see the repercussions. So, does this apply to your institution? Yes!
The third item listed in the NCUA Supervisory Priorities for 2024 is “Consumer Financial Protection.” The examiners will be focusing on overdraft Programs, fair lending, and auto lending, including indirect auto loans.
Did you catch that? Fair Lending is a focus for the NCUA, and examiners “will review policies and practices for redlining, marketing, and pricing discrimination risk factors.”
A CNN investigative report in December 2023 and the resulting class-action lawsuit should rattle every credit union executive. CNN compared conventional mortgage approval rates of white applicants and black applicants at 50 major lenders in 2022, finding a wide disparity at Navy Federal Credit Union. The CNN analysis also found that Latino applicants had significantly lower approval rates.
First, a media exposé. Then a class-action lawsuit. Now congressional members are calling for investigations, which will follow with even more diligent exams.
If CNN is looking at your loan application data, you should be too! The examiners have made it clear that they will be looking at your policies and practices to determine risk factors. The fair lending-focused exams will be detailed, and even more scrutiny will be placed on these exams after the CNN findings.
Fair Lending Questions Credit Union CEOs Need to Ask
Every credit union CEO, C-suite, and board should be taking a close look at their loan portfolios and practices and asking:
1. How do we currently evaluate or assess the composition of the approvals and denials of loan applications?
- Do we look at the approval and denial totals and ratios of protected class individuals as compared to our control group (or non-protected class)?
- Do we do the analysis for all consumer loan types, including mortgage loans, consumer loans, indirect auto loans, etc.?
2. Do we look at the total number of applications from specific geographic regions or census tracts?
3. What do we do with the analysis conducted in questions #1 & #2?
4. Do we have a fair lending policy that is current and distributed throughout the organization? Is it forward-facing (public)?
5. Do we do annual fair lending training for all employees, as well as the board?
6. Do we have a second review process for denied loans?
7. Do we have standard procedures for all our lending products? Include:
- Pre-established pricing structures (interest rates, fees, etc.)
- Underwriting criteria (credit scores, loan-to-value, debt-to-income, cash deposits)
- Loan terms
8. How do we analyze our complaints to identify trends, and how often?
9. Do we have standard procedures for documenting and reporting underwriting exceptions, and are we analyzing that information for trends?
10. Do we monitor servicing activities, such as fee waivers?
11. Do we have a fair lending risk assessment that is regularly reviewed and updated?
12. Has compliance reviewed the marketing materials and outreach to ensure they are representative and encompass all of the lending areas?
13. How often is the fair lending analysis reported to senior management and the board?
The only way to know for sure that your credit union is complying with fair lending is to take a hard look at your data. Obviously, you are going to look at loan data, but you also need to look at complaints, as well as servicing issues, such as fee waivers. If you do not analyze your own data, someone else will do it for you (like the examiners or CNN!), and you may not like their results. I always tell clients that they are the best ones to “tell their story” because if someone else comes in, the results may not include a happy ending.
Related: Fair Lending 101: Pricing is Only One Piece of the Puzzle
Credit union action steps for fair lending data analysis
After you analyze your data, here’s what you need to do next:
- Identify the root causes of any data abnormalities
- Make the necessary changes to policies/procedures/staffing
- Conduct training (including target training, if necessary)
- Communicate the changes to personnel
- Re-analyze the data 60 to 90 days after the changes are implemented to ensure they are effective
When you document this process, you are helping to ‘tell your story’ – explaining what you found and what you did about it. But you can’t tell your story if you aren’t analyzing your data thoroughly.
The NCUA has made it clear for several years that consumer protection is a priority, and now they have targeted fair lending exams. They are coming your way. Are you ready?
Not sure about next steps? Speak to one of our fair lending experts.
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