Fair Lending Reviews

Here’s Why Fair Lending Reviews Should Be a Priority

First of all, a Fair Lending review includes a look at the other consumer compliance regulations:

• Truth in Lending
• Fair Housing
• Equal Credit Opportunity
• RESPA
• HMDA
• CRA
• and, now UDAAP

Further, the regulatory agencies have some real teeth when they discover what they feel is serious Fair Lending non-compliance. Namely, they can elect to refer violations to the Departments of Justice or Housing and Urban Development in addition to whatever enforcement action they deem necessary.

It is critically important for a bank to demonstrate that the fair lending house is in order and that fair lending is at the front of the institution’s mind. Given the substantial cost for non-compliance, a smart bank (particularly an active lender) will take an annual look at how well it is living up to the Fair Lending standard. Which means, conducting a review combined with a risk assessment. (NOTE: in some circumstances, a Fair Lending review should be supervised by the bank’s attorney so that the work product can be protected by privilege.)

Fair Lending is an alphabet soup:
TIL, RESPA, ECOA, HMDA & CRA.

The TIL and RESPA regulations deal with consumer disclosures as well as certain prohibited practices by the various players in a mortgage loan setting. Fair Lending also involves making certain that all prospective loan applicants have a fair chance at affordable credit (ECOA, Reg B). Fair Lending does not permit a bank, under any circumstances, to overtly or indirectly play favorites among loan candidates.

Likewise, HMDA and CRA demonstrate statistically how well a bank is serving all consumers in the bank’s market — or more precisely, they show the distribution of loans, and loan types, in the bank’s market, clearly delineating under-served geographic areas.

Why is Fair Lending linked to UDAAP?

Essentially, UDAAP is focused on whether a lender is transparent and timely with disclosures. If there’s a doubt that consumers can’t understand your terms, or whether they received them in time to make an informed purchase, then the concern over “fairness” arises. UDAAP is a game changer for financial institutions. It’s not a matter of cost so much as it is a matter of a change in thinking about what is adequately disclosed. Examiners have held that a disclosure that can’t be read (think car dealer TV commercials) isn’t really disclosed.

What does a Fair Lending exam look for?

The bank examiner is looking at your procedures to make a judgment about the fairness of your bank’s business practices. Were the disclosures provided on time and in a good form? Did somebody in the bank validate your terms under the UDAAP standard? A statistical review of a bank’s actual performance (including your CRA and HMDA log) and some custom analysis will be conducted to determine if actual discrimination exists. (Find out what the regulators expect.) Customer complaints will be analyzed along with your response. (You do have a complaint program, right? It’s available 24/7 on the web, correct?) Overall, the examiner wants to see if you are playing straight, living by both the spirit and the letter of the regulation.

Read more about Regulatory Expectations of Fair Lending compliance.