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:
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:
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:
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:
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:
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.
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.