Financial institutions are under constant and increasing scrutiny from regulators to manage fair lending risk and ensure compliance with fair lending laws. In this context, conducting fair lending risk assessments is paramount for risk managers who are aiming to not only meet legal requirements, but also promote positive customer outcomes and avoid appearances of practices that may be viewed as discriminatory.
Why Fair Lending Risk Assessments Are So Important
Fair lending risk assessments allow institutions to identify potential red flags in their lending practices that may unnecessarily create fair lending risk, but they also ensure that inevitable risks are also properly mitigated as feasible.
Said reviews can expose potential issues and illuminate any underlying trends in lending practices. Through a system-wide review of policies, procedures and data, this type of assessment can uncover potentially systemic issues that, while unintentional, may be indicative of illegal discrimination or other types of compliance related risk.
Examples of problems that may be discovered during an assessment include lack of uniformity in credit decision processes, inconsistencies in collection procedures, and unequal distributions in certain loan programs across different demographic groups.
What a Fair Lending Risk Assessment Looks Like
A thorough assessment process will include testing protocols to ensure consistency throughout the organization. This includes third-party testing for internal processes related to loan origination and credit decisioning, as well as regular monitoring of external vendors that interact with customers on behalf of the bank.
By proactively evaluating practices both internally and externally, banks are better equipped to identify potential areas of concern early on and correct them before they become problematic.
Finally, any effective fair lending risk assessment should include ongoing training initiatives to educate staff members about relevant regulations and best practices. Banks must regularly engage with employees at all levels of the organization – from entry-level associates up to senior executives, and Board leadership – to make sure everyone is equipped with the knowledge necessary to navigate today’s complex regulatory environment.
With adequate education around fair lending, banking personnel are better able to protect the Bank from fair lending related problems. Additionally, banks should provide resources so employees can take part in continuing education programs or industry conferences on topics such as consumer protection laws and/or fraud prevention strategies.
What to Know BEFORE a Fair Lending Risk Assessment
There are two key points to bear in mind before embarking on a fair lending risk assessment.
First, don’t be afraid to take a hard and critical look at your organization. This is imperative, not only to ensure an in-depth analysis, but also to have credibility with your regulator. They must understand that you are not afraid to “peel back the layers of the onion” and be objective about the risk your institution may face. In this regard, it is often better to engage an outside analyst to conduct the assessment as they can usually be more objective.
Accordingly, understand that this is a risk assessment tool: the purpose is not to conclude if there is or is not discrimination. Instead, the purpose is to identify areas of risk so that strategies can be employed to mitigate them.
Second, be comprehensive. The scope of fair lending examinations can be wide. Do your best or insist that the party you engage to conduct the assessment leaves no stone unturned, and look at every facet of your institution’s lending related activity.
Pertinent guideposts in this regard includes feedback from recent and past fair lending examinations as well as fair lending regulations and examination procedures.
Also, review all current fair lending related enforcement actions to see what issues have been common with other lenders. These are good indicators of potential risk your institution may face. Discussions with peers and other compliance professionals can also assist in ensuring all the bases are covered in the assessment.
Putting It All Together
To summarize, fair lending risk assessments are complex – but critical – to perform on an ongoing basis for every bank. The areas that should be assessed include, but are not limited to:
- System-wide review of policies and procedures
- Quantitative analysis of underlying trends in lending practices
- Testing protocols to ensure consistency throughout the organization
- Monitoring of external third-party lenders and vendors for fairness
- Ongoing training initiatives to educate staff members about relevant regulations and best practices
- Continuing education resources for employees
- Use the information gathered to reduce risk
Fair lending risk assessments are essential for banks seeking to maintain a positive reputation within their community and effectively serve and protect their customers. For ambitious banks looking beyond mere compliance in order to foster sustainable growth, maintain a positive community perception, and avoid costly fair lending issues, these efforts are more important than ever before.
If your bank is in need of a fair lending risk assessment, Premier Insights has been in the business of helping banks manage risk through assessments, analyses, policy development, and training for nearly 30 years. Reach out today to discuss your bank’s needs.
DOES YOUR BANK NEED A FAIR LENDING RISK ASSESSMENT?
Contact us today to discuss your needs. Let our nearly 30 years of experience back you up when the regulators next come poking around your bank.