Preparing for a fair lending examination can feel daunting, but with a proactive approach and a deep understanding of your institution’s practices, you can navigate the process with confidence.
Drawing from our experience and regulatory guidance, here are 10 key areas your bank must be aware of and/or have analyzed about its past performance to be ready for its next fair lending examination.
Fair Lending Exam Prep Must-Do’s for Your Bank:
- Thoroughly Understand Core Fair Lending Principles: Ensure all relevant personnel deeply understand the prohibition of discrimination based on protected characteristics, the mandate for equal opportunity including reasonable accommodations, and the necessity of consistent application of credit standards. Review internal policies to confirm these principles are clearly articulated and consistently followed.
- Evaluate and Document Your Compliance Management System (CMS): Examiners will scrutinize your CMS to assess its effectiveness in mitigating fair lending risks. Be prepared to describe and demonstrate the specific elements of your CMS related to fair lending, including board and management oversight, policies and procedures, training programs, monitoring and audit processes, and complaint resolution mechanisms. Highlight any recent enhancements or changes to your CMS.
- Analyze Your Loan Portfolio for Inherent Fair Lending Risks: Understand the inherent risks within your loan portfolio. This includes evaluating risks associated with new product introductions, significant portfolio growth in specific areas, purchased loan portfolios, third-party lending relationships, loss mitigation efforts, Special Purpose Credit Programs, and the types of loans offered. Document any analyses you’ve conducted to identify and address these risks.
- Scrutinize Underwriting Practices for Consistency and Discretion: Examiners will review your underwriting methods, noting differences by product, channel, or third party. Be prepared to explain your underwriting criteria, whether discretion is permitted, how exceptions are documented and tracked, and how any automated systems or AI/machine learning are used. Analyze past underwriting decisions to identify any inconsistencies in the application of standards between different applicant groups.
- Examine Pricing Methodologies and Potential for Disparities: Understand and be able to explain your institution’s pricing methods for each product, including how interest rates, points, and fees are established. Note any differences by lending channel or the role of third parties. Analyze your pricing data for any unexplained disparities between control and prohibited basis groups. Be prepared to justify pricing differences based on legitimate factors like cost and risk.
- Assess Steering Risks Across All Lending Channels: Evaluate the potential for steering to occur, particularly where loan officers have discretion in referring customers to different loan products or lending channels. Review your policies and procedures related to product recommendations and referrals. Analyze data to see if there are significant differences in the percentage of prohibited basis applicants across different product types or lending channels.
- Review Marketing Efforts for Fair Lending Compliance: Be prepared to detail your marketing efforts, including digital advertising and outreach. Analyze whether your marketing efforts reach all segments of your market area and whether any targeting based on particular products or demographics could raise fair lending concerns. Understand the demographic composition of your market area.
- Analyze CRA Assessment Area and Lending Patterns for Redlining Risks: Understand the demographic composition of your CRA assessment area and market area. Analyze your loan dispersion patterns to identify any conspicuous gaps in lending in areas with high concentrations of minority residents. Be prepared to explain any differences in lending practices or product offerings across different geographic areas.
- Prepare Information on Self-Tests and Self-Evaluations: If your institution has conducted any self-tests or self-evaluations related to fair lending, be ready to share all information regarding self-evaluations and certain limited information related to self-tests. Understand the requirements for acceptable self-testing. If you intend to rely on these to streamline the examination, ensure they were reliable and appropriately conducted.
- Review Past Examination Findings and Address Recommendations: Be thoroughly familiar with findings and recommendations from your previous fair lending examinations. Document the steps your institution has taken to address any identified violations or areas for improvement. Examiners will likely assess the effectiveness of your corrective actions.
By focusing on these ten key areas, your financial institution can significantly enhance its preparedness for a fair lending examination, demonstrating a commitment to compliance and equitable lending practices. Remember that proactive analysis and a strong understanding of your institution’s data and processes are crucial for a successful review.
