What is fair lending?
The financial institution environment is constantly evolving. New regulations, rate changes, and other mandatory updates increase the urgency in the industry to adhere to the regulations while following current procedures, which can sometimes seem outdated, to ensure fair lending is achieved. Fair lending is a practice required of financial institutions to ensure their lending efforts are identical across all borrowers and free from discrimination. Fair lending is enforced by federal regulators and can be considered a “hot topic” included in regulatory audits.
Fair lending is steered primarily by two U.S. Dept. of Justice regulations: the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The ECOA prohibits discrimination based on borrower characteristics such as race, color, religion, national origin, sex, or other characteristics. FHA prohibits discrimination in all aspects of residential real estate-related transactions, such as purchasing real estate loans and selling or renting a dwelling.
Additionally, two other regulations fall under fair lending practices: the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA). In August 2009, the Federal Financial Institutions Examination Council (FFIEC) published the Interagency Fair Lending Examination Procedures. This document replaced the previous fair lending procedures, which were issued in March 1994. The 2009 procedures are the most current guidance for financial institutions and auditors.
What is today’s challenge?
Recent findings by financial institution regulators regarding fair lending found evidence of “redlining,” which is the practice of denying a creditworthy applicant a loan for housing in a certain neighborhood even though the applicant may otherwise be eligible for the loan, as well as overt policies for the pricing or underwriting of credit. These findings could indicate the difficulty financial institutions might be experiencing in adhering to the 2009 procedures while doing business in today’s lending environment.
How can you ensure compliance?
To ensure continuing compliance with the required fair lending regulations, financial institutions should scrutinize their current policies and procedures, especially those related to real estate and non-real estate consumer lending and interactive analyses of HMDA data. Institution leaders should develop a detailed and comprehensive fair lending risk assessment that is based on quantitative and qualitative methodologies, establishes an inherent level of risk, considers comprehensive mitigating controls, and presents residual levels of risk. Leaders also should ensure all fair lending requirements, such as the administration of late fee waiver requests and forbearance requests, are included in bank policies.
Additionally, technology can assist in helping financial institutions identify redlining and lending gaps in their lending practices. With this knowledge, institutions can focus outreach efforts to mitigate any non-compliant lending practices.
As a professional services firm offering audit and assurance services to financial institutions, PYA helps clients with fair lending compliance through detailed lender interviews, incorporating the latest technology to identify redlining and lending gaps, assists clients with developing risk assessments and compliance programs, and examines the institution’s policies and internal controls to ensure adherence to the 2009 fair lending procedures.
If you need assistance with fair lending practice compliance, preparing for an examination, or any other area related to regulatory compliance, our executives are happy to assist. You may contact them via email or by calling (800) 270-9629.
