Presentation on theme: "Senior Leadership Fair Lending Training. Fair Lending - Course Objectives This course is designed to help the Board of Directors: Grasp the legal foundation."— Presentation transcript:
Senior Leadership Fair Lending Training
Fair Lending - Course Objectives This course is designed to help the Board of Directors: Grasp the legal foundation for fair lending obligations; Understand the source of fair lending risk in the bank’s business operations; Expect management to be SMAART about managing fair lending risk; and Assure that Board expectations for compliance accountability are being reflected in audited performance.
Fair Lending Legal Foundations - In a Nutshell What is fair lending and how does it apply to the Bank’s products? Fair lending is the consistent, objective and unbiased treatment of all consumers without regard to any basis prohibited by law (e.g., race, color, religion, national origin, sex, age, marital status, etc.) Fair lending laws and regulations apply to all credit products and credit-related services for both consumer and business purposes. Fair lending obligations apply to all aspects of your credit transactions including marketing, application, underwriting, pricing, servicing and collections. Fair lending is fundamentally the application of objective, safe and sound lending criteria to similarly situated people similarly; thereby avoiding any differential treatment of your customers that varies by a prohibited basis.
Fair Lending Legal Foundations - Basic Laws Two primary laws govern fair lending practices: Equal Credit Opportunity Act (ECOA) / Regulation B ECOA, enacted in 1974, prohibits discrimination based on race, color, religion, national origin, sex, marital status, age, source of income, or whether a person exercises rights granted under the Consumer Credit Protection Act for any credit transaction. Fair Housing Act (FHA) The Fair Housing Act is part of the Civil Rights Act of The FHA makes it unlawful for any lender to discriminate in housing-related lending activities against any persons because of their race, color, religion, national origin, handicap, family status, or sex. NOTE: State or local laws may include additional prohibited bases, such as sexual orientation.
Fair Lending Legal Foundations - Related Laws Home Mortgage Disclosure Act (HMDA) / Regulation C HMDA requires certain recordkeeping and reporting to be performed in connection with home purchase and home improvement loans. Regulators use the data to assist in evaluating lender compliance with anti-discrimination laws and other consumer protection laws. Community Reinvestment Act (CRA) / Regulation BB Rather than specifically prohibiting discrimination, the CRA encourages institutions to help meet the credit needs of the communities which they serve. A poor fair lending record can negatively impact a CRA rating and can result in the denial of applications to open a branch, relocate an office, or acquire another financial institution.
Fair Lending Practices - Scope of Requirements Although regulators have traditionally focused on lending areas that permit human judgment (e.g., underwriting and pricing), fair lending requirements apply to the entire credit administration process, including: New product development Advertising and marketing Taking applications Processing applications Pricing Credit risk and underwriting Account servicing activities Collections and loss mitigation
Fair Lending Legal Foundations--Risk Types Non-compliance with fair lending laws presents several risks to financial institutions. Regulatory risks: Adverse examination findings and supervisory corrective action. Litigation risks: Private and governmental lawsuits. Reputational risks: Tarnished public image and lost franchise value.
Sources of Fair Lending Risk - Market Strategy Strategically limiting your retail credit footprint other than due to your business capability for lending risks refusing loans to qualified borrowers in a particular geographic market that varies by the prohibited bases characteristics of the residents: possible redlining. Manage this risk in the product development stage by projecting how your footprint will impact geographic areas delineated by the characteristics of the residents and continue to monitor your marketing efforts and loan production results as lending activity grows. As you plan your business development anticipate its impact and monitor market penetration when executing your strategy.
Sources of Fair Lending Risk - Market Strategy Promoting different programs within a loan type risks steering otherwise qualified borrowers to a program with less favorable terms or conditions in a way that treats them differently due to a prohibited basis. Manage this risk by adhering to program standards and training staff against sales practices that may depend on pre-judgments or stereo- types and monitor the resulting distribution of applicants and borrowers across your different programs. Use diverse options to tailor credit solutions to better serve the range of qualifications of a diverse community.
Sources of Fair Lending Risk - Lending Discretion Discretion in underwriting or pricing risks loans being denied or priced in ways that end up varying by the applicant’s prohibited basis characteristic. Banks can manage this risk by insisting that originators document the objective basis for their judgments and then monitor the consistency of loan production decisions. Discretion in processing loans can result in poor treatment that discourages applicants discriminatorily. Manage this risk by training staff to assist all applicants similarly in helping them complete the process and monitor the quality and duration of applicant processing and evaluate reasons why applicants withdraw. Today’s deserving applicants are tomorrow’s good customers.
Sources of Fair Lending Risk - Lending Exceptions Allowing exceptions to your objective standards for underwriting or pricing a loan risks loans being accepted, denied or priced in ways that over time end up varying by the applicant’s prohibited basis characteristic. Banks can manage this risk by documenting the objective basis for exceptions and then monitor the exceptions and the reasons for them to ensure all applicants similarly situated with those receiving favorable exceptions are receiving similar favorable treatment. Conduct monitoring for those adversely effected by exceptions too. Board members in banks often exercise exception authority and need to be vigilant about consistency when they do.
Sources of Fair Lending Risk - Third-Parties Delivery channels like wholesale mortgage operations or indirect auto loan programs expose the bank to the risk that credit judgments of third-parties may result in loan qualification and loan terms varying by the prohibited bases characteristics of applicants. Manage such third party operations by expecting each to abide by fair lending requirements and monitor how loan production meets standards both individually and across your channels’ aggregate experience. Control for risks from relying on third-parties involved in any part of your lending operations. Understand your business partners’ and agents’ compliance track record and evaluate their performance in serving your needs against your fair lending standards.
Be SMAART about Fair Lending Components of a comprehensive SMAART SMAART compliance management program S Systems M Monitoring A Assessment A Accountability R Response T Training
SMAART Governance Questions Systems = Are procedures in place to assure products are delivered as intended and recorded as necessary? Monitoring = How are people/processes supervised to maintain consistency? Assessment = How do you check performance results and assess risk?
SMAART Governance Questions Accountability = How do you apportion and assure responsibility for achieving expectations Response = How are problems corrected? Training = How is information communicated and expertise maintained?
Fair Lending Objectives - Setting Expectations A SMAART compliance program (implementing your culture, controls and communications) should mitigate your risk profile so that the resulting risk exposure achieves your fair lending objectives set in accordance with your tolerance for risk of damage to your bank and your customers. Risk profile + SMAART = risk exposure Risk exposure =?= risk tolerance Risk tolerance = fair lending objectives Fair lending objectives = law abidance under conditions of uncertainty What are your bank’s fair lending objectives and how are they articulated so management and staff can understand and fulfill them?