5 Tips to Avoid Being Prioritized for a CFPB Fair Lending Exam

Like the rest of us, the Consumer Financial Protection Bureau has acknowledged the need to work efficiently and effectively.  In order to do this, the Office of Fair Lending, has developed a fair lending risk-based prioritization approach that assesses and determines where to focus their time (entities, products and markets).  Here are the 5 factors the CFPB will evaluate to determine if your institution will be prioritized for a Fair Lending exam.

The Consumer Financial Protection Bureau recently released a Fair Lending report, and last week we blogged about the insights and advice offered by the report. In that report, the Bureau explained that they use a risk-based prioritization approach that considers five main factors. 

The 5 risk-based assessment factors they employ to determine where to focus their time and efforts are: Complaints and Tips; Supervisory Enforcement History; Quality of a Lender’s Fair Lending Compliance Management System; Data Analysis; and Market Insight.

Below we provide a brief review of each of the five factors, and what the CFPB will be looking for. We also include guidance on how to manage compliance and tips about how to avoid prioritization. Starting with complaints and tips, let's get into it:

1. Complaints and Tips

The Bureau examines complaints from a variety of sources (from consumers, advocacy groups, whistle blowers, and other government agencies), and they are looking for evidence of potential discrimination. Your financial institution should as well. You need to consider how your institution respond to these complaints and tips.  

Avoid Prioritization: Make sure your compliance management system includes the following items, because the regulators will be looking for them when they evaluate your organization:

• Complaint Policy: Do you have a written complaint policy? 
• Inquiry vs. Complaint: Do you have a defined perspective for your team members or are you allowing individual interpretations?
• Team Member Training: Has there been training on how to manage an inquiry/complaint? 
• Complaint Testing: Have you tested a complaint to ensure it flows the way management would like? 
• Complaint Escalation: Do you have escalation procedures for any claim for discrimination?
• Tracking, Reporting, Discussion: Do you track frequency, reason code, aging, ownership and mitigation results? 
• Centralized/Neutral Management (Assign Clear Ownership): Do you have a centralized party that collects, distributes, records, monitors and reports your complaints? 

2. Supervisory and Enforcement History

You need to evaluate your supervisory and enforcement history, because the regulators will be reviewing it. You will need to show that any issues identified in a prior exam have been addressed. If and when best practice institutions have a supervisory issue, they will record, identify root cause(s), and track efforts to address the concerns. Most financial institutions will work with their regulator to ensure that the solutions are appropriate well before the next exam.

Avoid Prioritization: The key to avoiding prioritization is avoiding the regulatory issue. After a regulator formally identifies an issue, you have to aggressively address the issue to avoid a repeat finding. To clearly demonstrate your remediation efforts, make sure you:

• Identify Issues: Clearly identify the issue brought forward by the regulator.
• Understand Causes: Look to understand root cause of the issue.
• Address Risk: Identify ways to mitigate risk.
• Assign Ownership: Identify key point people on your team, and assign ownership of particular concerns.
• Communicate: Keep lines of communication with regulator open to ensure alignment.
• Record: Document and track to ensure execution and completion (bring management optics).

3. Quality of Lenders’ Fair Lending Compliance Management System (FLCMS)

Make sure that your Fair Lending CMS is based on the size, complexity, and risk profile of your institution. The regulators will be evaluating the quality of your program relative to your institution. 

Avoid Prioritization: The CFPB says your baseline Fair Lending compliance management program should consider the following:

• Fair Lending Policy: Make sure you have an up-to-date Fair Lending policy statement.
• Fair Lending Training: All employees should be trained annually. Role specific training is important for those team members involved with offering and providing credit (e.g., marketing, underwriters, pricing, loan officers, service team members).
• Ongoing Monitoring of Compliance – Fair Lending, Reg B, and HMDA Policies and Procedures: Review the policies and procedures that relate to Fair Lending, Reg. B and HMDA for compliance.
• Ongoing Monitoring of Compliance – Related Fair Lending Policies: Underwriting, Pricing, Marketing, Servicing/Loss Mitigation are some of the related policies that impact fair lending.
• Review of Lending Policies for Disparate Impact: Review for any lender policies that may have a negative effect on certain applicants (e.g. no loans below $60,000).
• Regular Statistical Analysis of Loan Level Data: Review for disparities on a prohibited basis in applications, pricing, underwriting (among other things). The depth of review should correspond with the size and complexity of your organization.
• Review of the Marketing of Loan Products: Are products offered across the market area? Similar service provided? 
• Oversight of Fair Lending Compliance: Ensure active involvement in compliance from Management and Board. 

4. Data Analysis

The CFPB is a data-centric organization. They look at both the macro- market data as well as micro-level institutional trends. The Bureau is in the process of expanding HMDA - often referred to as HMDA Plus - to include age, collateral value (and loan to value), credit score, origination channel, points and fees, term to name a few. That means that your data analysis and management needs to be able to accommodate these changes.

Avoid Prioritization: As mentioned above, there are three primary areas the bank should be reviewing, at a minimum, on a regular basis:

• Application Flow: Compare applications to the underlying market indices (census data and market HMDA data) to evaluate application flow.
• Origination/Denial Rates: Compare prohibited basis groups to control groups, which are defined as the groups least likely to be discriminated against.
• Pricing: Review pricing to evaluate your potential for discrimination. Rate spreads analysis was originally designed to help determine if any prohibited basis group was subject to pricing/product.

Note: There are other data points that should be added to the analysis once the three basics above are understood.  Once you know your data and understand where disparities may exist, it is up to your institution to conduct loan level review to ensure that individuals that were similarly situated were treated the same.

5. Market Insights

Stay abreast of industry news and analysis. The Bureau monitors the lending markets for emerging developments and trends. They also use these factors to identify fair lending risks that require further study or action. For example, we know that the larger markets (like mortgage and auto lending) get more attention from the regulators - if your institution operates in any of those larger markets, you are in the regulatory spotlight. 

Avoid Prioritization: The best way to avoid prioritization based on market insights is to stay abreast of industry news and pay attention to what information the regulators are releasing. If you notice significant coverage of an issue, make sure that you evaluate how your institution responds that issue.

The message recently delivered by the CFPB can be summarized in two words: be proactive.

The best way to respond to the Bureau's scrutiny on specific credit markets is to proactively manage complaints, address supervisory issues, maintain a robust fair lending compliance management program, and analyze your data.

In order to be proactive, you have to take a risk based approach (similar to the one used by the Bureau).  For a quick litmus test for your organization, take 2 minutes and complete this one page self-assessment 

Will you be prioritized?

If you have questions or comments, please leave them in the discussion section below or contact us.