On Friday February 20th, 2015, the NCUA shared some insights in regards to how the regulators approach Fair Lending. Here are some common Fair Lending Exam Triggers and Best Practices.
It is “HMDA Week” for many in compliance. That means that you may be reviewing your HMDA data.
In honor of "HMDA Week," we've summarized these fair lending best practices and common tripwires, drawn from the NCUA's recent fair lending webinar. In our experience, best practices and common errors are universal across the regulators. So even though these best practices are derived from the NCUA's recent webinar, we believe you can confidently apply these tips regardless of your regulator.
Fair Lending Exam Triggers
Are you ripe for a detailed fair lending exam? The NCUA determines which organization will receive a fair lending exam based on the following triggers:
- HMDA data outliers
- Member or client complaints
- Prior regulatory violations
- General compliance risks
- Whistleblower complaints
- Recommendations from field examiners
- Other: Weak Compliance Management System, HMDA LAR errors, poorly executed Adverse Action Notices
This list of “exam triggers” are similar to what we see from other regulators when it comes to more in-depth fair lending compliance exams.
Fair Lending Compliance Best Practices
Here are four best practices that your organization may want to consider:
- Making Fair Lending a part of day-to-day operations, keeping in mind that fair lending is a team sport.
- Self-identify issues; remember, the regulators have said that the best compliance is the compliance management that comes from within.
- Be proactive with taking corrective actions.
- Have an effective fair lending Compliance Management System.
You may be wondering, "What are the elements of an effective fair lending compliance management system?" Here are a few:
- Board of Director and Management Oversight
- Ncontracts Tip: Board and Management should clearly understand their roles and responsibilities
- Policies and Procedures - Note that to be effective, these policies and procedures should be written in detail, reviewed regularly, and should cover all products.
- Ncontracts Tip: Have “fair lending” coverage in all phases of your operation: Advertising, Marketing, Underwriting, Servicing, Loss Mitigation, and Third-Party Oversight.
- Ncontracts Tip: Adopt a policy statement about fair lending compliance
- Training
- Ncontracts Tip: Staff, Management and Board should be included. Consider role specific training for those involved in providing credit products.
- Ongoing Controls - These should be appropriate for the institution's size and complexity. Some important controls are below.
- Conduct regular risk assessments.
- Ncontracts Tip: focus on the areas of your organization that carry the most risk exposure.
- Maintain monitoring and testing (e.g. HMDA or Consumer Data Analysis, Underwriting Exception Analysis).
- Ncontracts Tip: Don’t simply look inside your firm. Compare your data to industry benchmarks.
- Complete a compliance audit, considering transaction testing, Reg. B, adverse action notices, and HMDA scrubs.
- Ncontracts Tip: Be aware of the most common errors (see NCUA presentation).
- Document and share findings with management and board when appropriate. Take prompt and corrective action.
- Ncontracts Tip: Strike a balance between summary reports and detail. Management will benefit when there's interpretation of the results versus mounds of paper.
- Review Regulatory Environment for Changes
- Ncontracts Tip: Changes come from multiple sources in today’s regulatory world – formal regulation changes, regulator guidance, exam guidance, and industry settlements.
- Member Complaint Management and Response
- Ncontracts Tip: Define complaints and track them!
- Review New or Modified Product Introductions from a Fair Lending Perspective
- Ncontracts Tip: Ensure compliance has reviewed features, functionality and marketing positioning.
These elements of a strong compliance management system as outlined by the NCUA are aligned with recent guidance from the CFPB. The CFPB, in April of 2014, published the following list of elements in a well-developed CMS (click here):
- Policy: An up-to-date fair lending policy statement;
- Training: Regular fair lending training for all employees involved with any aspect of the institituion’s credit transactions, as well as officers and board members;
- Fair Lending Policy Monitoring: Ongoing monitoring for compliance with fair lending policies and procedures, and appropriate corrective action if necessary;
- Other Policy Monitoring: Ongoing monitoring for compliance with other policies and procedures that are intended to reduce fair lending risk (such as controls on loan originator discretion), and appropriate corrective action if necessary;
- Lending Policy Review: Review of lending policies for potential fair lending violations, including potential disparate impact;
- Data Analysis: Depending on the size and complexity of the financial institution, regular statistical analysis, as appropriate, of loan-level data for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction, to include both mortgage and non-mortgage products such as credit cards, auto lending, and student lending;
- Risk Assessment: Regular assessment of the marketing of loan products; and,
- Management: Meaningful oversight of fair lending compliance by management and where appropriate, the financial institution’s board of directors.
Ncontracts Viewpoint: The regulators continue to provide more specific guidance regarding the fair lending best practices. They've clearly stated that they are planning to analyze your data to determine if you are an outlier (e.g. denial rates, rate spread loans, withdrawals). The CFPB is "committed to using data-driven analysis" to identify and evaluate financial institutions. Your data - as well as and your complaints, compliance history, etc. - may lead to an in-depth examination of your fair lending compliance management system. Are you following best practices? Is your data a fair lending tripwire?
As many of you know, HMDA data is due on March 2nd. March 3rd is the starting line for “analysis season.” After you submit your data, the regulators will begin reviewing it, and composing a story about your institution's compliance based on their analysis. Put yourself in a strong position to present, explain, and share your story by analyzing and reviewing your data proactively.
At Ncontracts Partners, we help more than 500 organizations analyze and interpret their HMDA data. You can proceed with confidence with Ncontracts Partners.