Q&A Session with PYA on Fair Lending

What is Fair Lending?

Fair lending encompasses two regulatory areas; comes as both Fair Housing Act and then also the Equal Credit Opportunity Act. And both of those regulatory areas are focused on preventing discrimination on the basis of gender, race, ethnicity in residential real estate transactions and that s really what most people associate with fair lending, but also in consumer transactions.

What can a financial institution do to perform well in a Fair Lending examination?

Well, there are several things a financial institution can do to perform well on an examination on Fair Lending. Really, one of the biggest areas of focus will be determining what are risk factors and how do examiners look at area of Fair Lending when they come in to perform an examination. One of the areas that they re going to look at is being as a risk factor would be breaking out loan applicants into groups. And those would be the control groups which would represent the majority of your applicants, which in most cases might be a white male control group versus breaking out applicants into minority groups looking at, again, by gender, by race, ethnicity, what those minority groups may look like. And then looking for red flags, if you will, within those control groups and minority groups to see if they re perhaps higher denial rates within the minority groups in denying loan applications. Or they can also be disparate treatment in how those loans were priced, where you may see a higher average interest rate spread in the minority group compared to a control group. So, those would both be examples of higher risk factors the examiners may look at and determine how deep they want to go in a Fair Lending examination.

Do you have any advice for a financial institution on how to improve compliance with Fair Lending?

I do have advice for financial institution that s getting ready to go through a Fair Lending examination. I would recommend that any financial institution consider performing a self-assessment. A self-assessment would include several components. First, you would want to test for integrity of the data that s being utilized in that examination. And that s going to be data that comes from the Home Mortgage Disclosure Act, Loan Application Register or, it s called the HMDA-LAR. You want to make sure that data can be relied upon. And so that may involve some testing on the sample basis, going back to loan files, making sure that some of the data in that HMDA-LAR is in agreement with what s in the loan files. Also, you d want to look at the pricing sheets that are utilized in making lending decisions to make sure that the risk factors that are being considered in making the underwriting decisions are consistent regardless of the race, ethnicity or gender. And lastly, in the self-assessment, you want to document those efforts that you re making. It s going to be important for a regulatory examiner, when they come in and perform their examination, to be able to see the documentation and that it was accumulated throughout that self-assessment, and see the results and conclusion of that self-assessment.

Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

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