Fair Lending continues to be at the top of the list for all regulatory examinations. As a result, a financial institution’s fair lending program should consider the following areas to avoid potential trouble spots.
- Documenting reasons for pricing differentials between protected class and non-protected class applicants in detail. Justify and document based on credit and collateral principals, and ensure consistency.
- Document not only justification for pricing criteria deviation but underwriting criteria deviation as well. Document exceptions to standard underwriting or pricing criteria (ensuring that mitigating factors for policy exception are for a defensible business purpose). Such exceptions should be formally approved with higher authority approval noting that any discretionary pricing or underwriting practices are not impacting individuals on a prohibited basis.
It should never be noted that a pricing or underwriting deviation is “to meet competition.” There must be variation documentation “based on clear, quantifiable, and measurable defensible business purpose.”
- A denial “secondary review” should exist (especially for consumer HMDA applicable loans),
- Including fair lending as a component of appraisal review on residential appraisals.
- Establishing standards for referring applicants to subsidiaries, affiliates, or other lending channels.
- Reviewing and monitoring prohibited basis (fair lending) loan distribution by lending channel or product.
- Ensuring loan officers sufficiently inform applicants about available products to allow consumers to decide which option is best.
- Ensuring marketing efforts do not exclude specific regions or geographies within the financial institution’s market or CRA assessment areas.
- Reviewing loan application distributions to determine whether patterns exist that raise marketing concerns.
- Reviewing distribution of applications by race, gender, ethnicity, or location and comparing application rates for each group to the demographics of the lending area.
- Monitoring complaint trending.
- Ensuring that within secondary marketing that any pricing disparity can be explained by risk adjustments.
Hopefully consideration of the above can mitigate potential risks to your institution associated with violating Federal Fair Lending Laws.