Fair lending is not just a regulatory requirement; it's a fundamental aspect of having a business approach to banking. To ensure compliance and promote consistency, financial institutions should leverage both internal and external reviews. These reviews offer distinct yet complementary benefits, providing a comprehensive understanding of an institution's lending practices.
The Importance of an Internal Perspective
An internal review provides an opportunity to understand the nuances of your institution's operations. By examining your processes, policies, and data from the inside, you can identify potential red flags and areas for improvement.
- Involve Key Stakeholders: It's crucial to keep your board of directors and management informed. Their involvement ensures they are aware of any issues and can take appropriate action. Without their knowledge, they may be caught off guard during an examination. Having them onboard when changes are needed within the organization is also essential, which is why this aspect is so important.
- Know Your Data: A thorough understanding of your institution's data is CRITICAL. This includes analyzing loan origination, pricing, and underwriting data to identify any disparities or inconsistencies.
The Value of an External Review
While internal reviews are valuable, they can sometimes be limited by internal biases or a lack of specialized expertise. Think of it as trying to proof your own term paper. Being too close sometimes can obscure things that would be obvious from someone taking a fresh look. An external review further brings an objective perspective and specialized knowledge to the table.
- Detailed Analysis: External reviewers can provide a deeper analysis of your lending practices, identifying the reasons behind certain trends or disparities. For example, they can assess why there may be deficiencies in certain areas.
- Identifying Outliers: External reviews can help identify outliers in your pricing and credit underwriting. These outliers may indicate potential fair lending violations and warrant further investigation.
- Accountability: Management and the board are responsible for the bank, so it is important for them to understand the findings from both internal and external reviews. This also brings further reassurance they have the bases covered.
Conclusion
In conclusion, both internal and external reviews are vital for maintaining an effective fair lending program. By combining internal knowledge with external expertise, financial institutions can gain a comprehensive understanding of their lending practices and ensure they are complying with their fair lending obligations.
