Preparing for an upcoming fair lending examination can be stressful and time consuming. One of the main challenges is knowing what to focus on and how examiners may approach the examination. Each exam can be different, with a number of factors influencing an examiner’s approach, expectations, and focal points.
Below is a quick, broad checklist of the key pressure points that will likely be reviewed, and the institution needs to be prepared for when preparing for an examination.
Fair Lending Exam Prep Pressure Points:
- Disparities in Application Processing: Banks should monitor for substantial disparities in application processing times for applicants based on prohibited characteristics, especially within denial reason groups. This includes looking for significantly longer processing times for certain groups, which may indicate discriminatory practices.
- Withdrawal and Incomplete Applications: A substantially higher proportion of withdrawn or incomplete applications from prohibited basis groups compared to other applicants can signal potential issues. This could mean that certain groups are facing more hurdles or discouragement during the application process.
- Underwriting:
- Approval/Denial Rates: Banks need to carefully analyze disparities in approval and denial rates for applicants based on prohibited characteristics, particularly within similar income categories. This is a key area where discrimination can occur.
- Vague or Subjective Criteria: The use of vague or unduly subjective underwriting criteria can create opportunities for discriminatory practices. Banks should ensure that their criteria are clear, objective, and consistently applied.
- Exceptions to Standards: It’s crucial to monitor how exceptions to underwriting criteria, including credit scoring overrides, are handled. A lack of clear guidance or consistent application of these exceptions can lead to discriminatory outcomes.
- Denial Reasons: Banks should verify the reasons cited for denial are supported by facts relied on by the decision maker at the time of the decision.
- Pricing Disparities:
- Banks must analyze their pricing data for substantial disparities in interest rates, fees, and points charged to applicants based on prohibited characteristics. Differences should be justified by objective criteria related to cost or risk.
- They also should pay special attention to situations where financial incentives for loan officers or brokers could lead to higher prices for certain groups.
- Disparities in the incidence or rate spreads of higher-priced lending, as reported in HMDA data, should be carefully monitored.
- Loan programs that disproportionately serve a protected group or have significant differences in the percentages of protected groups should be examined for discriminatory pricing.
- Steering:
- Banks need to analyze referral patterns to ensure that applicants are not being steered to different products, channels, or subprime lenders based on prohibited characteristics.
- This includes looking for significant differences in the percentages of prohibited basis applicants across different lending channels or subprime subsidiaries.
- Redlining:
- Banks should analyze HMDA data for significant differences in the number of applications, withdrawals, and originations in areas with high concentrations of minority residents compared to areas with low concentrations of minority residents.
- They should compare approval/denial rates between these areas and examine denial rates based on insufficient collateral.
- Banks must not have an explicit demarcation of credit product markets that excludes areas with high concentrations of minority residents.
- Marketing:
- Banks should analyze whether marketing efforts, including digital advertisements and outreach, are targeted based on particular products or segments in a way that could be discriminatory.
- They should also review mailing lists for any exclusions based on prohibited basis or geographic areas with higher percentages of minority residents.
- A low proportion of prohibited basis applicants compared to that group’s representation in the total population of the market area is a risk factor.
- Use of Surrogates: Examiners may use “surrogates” or proxies for race or other protected characteristics when direct data is unavailable. This includes Hispanic or Asian surnames or an applicant’s given name. Banks should be aware that these proxies can reveal potential discrimination in their lending practices and should rebut any presumption of discrimination.
- Data Integrity: Banks need to verify the accuracy of the data used in fair lending analysis, such as HMDA/LAR data, before proceeding with an analysis. Inaccurate data can lead to flawed analysis and missed violations.
- Self-Testing and Self-Evaluations: Institutions may conduct self-tests and self-evaluations to identify and address fair lending issues. Data from reliable self-evaluations can help streamline the examination process. Examiners will look for whether the self-evaluation data is accurate and if the institution is taking appropriate action to correct issues.
- Monitoring for Compliance:
- Banks should have systems to monitor their lending practices and identify potential disparities. This monitoring should cover all aspects of the lending process, from application to servicing.
- This includes monitoring the nature and frequency of exceptions to its standards and ensuring reasons for denial are accurately communicated.
- Consumer complaints alleging discrimination should be reviewed and addressed promptly.
By focusing on these areas, banks can use data analysis to proactively identify and address potential fair lending issues.
