Historically, business lending has not been the focus of fair lending reviews during bank examinations. The focus is usually on HMDA reportable applications since government monitoring information (GMI) is available and, therefore, protected and non-protected classes status is readily identifiable. How is that changing today?
A Changing Landscape
As techniques for evaluating fair lending have evolved into more of a statistical application, the scope of reviews has been expanded to a wider universe of loan products. Today, large consumer loan portfolios have been the subject of scrutiny as well as the basis for a number of enforcement actions against lenders.
In the past few years regulators have hinted at expanding the scope of their fair lending reviews to include commercial credits.
This year, the CFPB officially announced in their 2017 report that business lending would be one of their focal points and priorities for the year.
We have addressed previously some of the hurdles to conducting a valid analysis of commercial lending, so it makes sense that regulators have not historically focused on these products. That notwithstanding, the concept of evaluating business lending with respect to fair lending is not entirely new.
The Interagency Fair Lending Examination Procedures (IFLEP) contains guidance on how such reviews are to be conducted, and the CFPB was granted authority to create regulations related to business credit along with the anticipated additions of GMI data to be collected for CRA submissions. The reporting of this data, assuming it does take place, would hasten attention to commercial portfolios.
Since this is such uncharted territory, it would be wise for lenders to begin thinking and preparing for possible scrutiny of their business lending.
Getting Your Institution Prepared
The first step in problem solving is simplification. Here are some steps that can be taken to begin moving in the right direction:
1) Determine the primary risk areas in terms of products
Factors to consider here are volume of lending activity and do objective decision factors exist, or is the process more “free form”?
2) Begin evaluating and refining policies
A good starting point here is to have lenders explain how they arrive at decisions concerning loan pricing and underwriting.
3) Product segmentation
Call reporting categories would be a start, but there are likely a number of subsets within these based on loan size, collateral, and types of businesses. This would help in number 4, below.
4.) Begin quantification of policies
Commercial loan decisions tend to be more judgmental which creates challenges for fair lending assessments and increase risk.
5.) Start small
Select one or two products as identified in Point #1 above and focus on them first.