Fair lending compliance remains treacherous waters for financial institutions. The advent of Dodd-Frank added a multiplicity of compliance challenges to an already significant regulatory burden. This has left fair lending just one of many issues with which banks must contend, meaning efficiency is an absolute necessity in order to be successful.
It was said of football coaching legend Vince Lombardi that much of the practice time he spent on the field with his players was focusing on the fundamentals of the game, such as blocking, tackling, and even holding the football. Even a casual observer of the game understands that most games turn on missed or well executed tackles, blocks, or a runner or receiver who did or did not hold on to the ball rather than some type of “trick” play. Simply, the basics should not be neglected.
Below we present 5 basic tips that will assist in managing fair lending risk. All of these are present in a good fair lending risk management system, but strengthening these (or adding if they are not present) will enhance fair lending compliance management.
1. Simplify and quantify loan policy
This is the foundation of fair lending management. Without this, fair lending will always be a struggle. Without truly objective and quantified loan policy, it is difficult to do the two things you must do: manage and measure. Unless this exists, fair lending will remain a high-risk area for the institution.
2. Have a service culture
Sometimes, there is resistance from lenders and other staff to making policy changes based on fair lending related risk. This is often because personnel do not feel they discriminate and resent the implication that making changes suggests.
When you boil things down, however, fair lending should be approached as a service issue: valuing the customer, putting the customer first, and treating them as one would want themselves and their own family and friends treated. Emphasizing service as the focus keeps it positive, is good for business and will accomplish many of the same goals.
In our practice, we have observed numerous issues stemming from complaints that could have been avoided had the situation been handled differently. (We will expand on this in a future post.)
3. Understand the fair lending management process
Properly managing fair lending is not a static process but one that is dynamic and cyclical. The process starts with good policy which then is managed and measured. Then adjustments are made as needed, and the process repeated. The figures below illustrate this. It must be ongoing.
4. Use internal and external resources
An institution cannot manage fair lending by internal reviews and resources alone. Similarly, a bank cannot rely solely on external reviews to manage fair lending risk. Successful programs have a blend of both internal and external efforts.
5. Manage the fair lending regulatory review
Banks typically know ahead of time when fair lending reviews will be conducted by examiners. Time should be spent preparing for the review; and if the four keys stated above are in place, the institution should have a good head start.
Although there are many steps in the review process, the goals should be to be able to explain a compliance management system (CMS) that adequately manages fair lending risk and have data and documentation to prove it. During the review, the bank should allocate resources and the appropriate staff to be responsive to requests to ensure accurate and complete information is provided.
It is important to have staff assigned to the review that both understand the bank’s policies and procedures but can also effectively communicate. Consistent interaction with examiners is also important during the process to ensure any concerns they may have are addressed and supporting documentation provided.
There is power in simplicity and mastering the fundamentals. Instituting or becoming better at the tips above will help ensure the best chances of success at fair lending.