An inter-agency webinar featuring “hot topics” was conducted Thursday, November 16th and included officials from the CFPB, Federal Reserve, FDIC, HUD, NCUA, OCC, and the Department of Justice. The webinar covered issues related to the new HMDA data and fair lending.
Although there was nothing covered that was entirely new with regard to fair lending, one thing noted was the importance of managing fair lending risks related to consumer loans.
As we have noted many times previously, the main challenge from a management standpoint for fair lending is the lack of GMI. This information is not and can not be captured, which makes monitoring difficult and also creates a quandary for the institutions as to how they track information that they are prohibited from collecting.
There are obviously methods to estimate protected bases classifications for data, and we have discussed these at length as well. Officials participating in the webinar provided some general guidance in the form of resources but did not provide specifics as to preferred methodologies or applications thereof.
The priority across the regulatory spectrum is currently focused on identifying and understanding risk to include risk mitigation and management. While fair lending risk is thought of in terms of monitoring, such an approach is always after the fact and is only one method for addressing fair lending risk.
Although monitoring will always be a component in fair lending risk management, there is a way to be even more proactive and also one which does not create the complexities of relying solely on proxy methods to assess risk.
The solution lies in eliminating or greatly reducing the two inherent fair lending risks for financial institutions:
- Loan pricing risk and
- Loan underwriting (decisioning) risk
Instead of relying solely on monitoring or look-backs, the idea is to proactively remove such risk as part of the lending function itself.
Many institutions believe they are already doing this and that their policies demand fair treatment of all customers in regard to lending; and, granted it is safe to say, financial institutions in general are not making efforts to intentionally and unlawfully discriminate.
Intent, however, is not necessary to create risk, as fair lending risk is inherent in any lending operation.
There is fair lending risk where there is any opportunity for inconsistencies, practices that are consistent but do not have a sound business basis, errors, or variation in underwriting or pricing that are not tied to quantifiable attributes.
Fair lending is always thought of in terms of monitoring for these issues based on prohibited factors. Where prohibited bases data is not available, as in the case with non-HMDA lending, this becomes problematic as a sole strategy.
A proactive approach is to address this risk “upfront” by having fair lending risk management embedded in the lending function itself.
This is accomplished by having specific and quantified parameters by which loans are both decisioned and priced and with no or only very tightly managed deviations allowed. This, of course, would have to be both enforceable and trackable to be effective.
Being able to accomplish such would remove virtually all the fair lending risk associated with a lending operation and greatly streamline what would be required from a monitoring standpoint.
To be successful at what we are describing requires policies that:
- work in practice
- create a profitable loan portfolio
- are simple enough to be explained
- are quantifiable enough for measurement and testing
The downside here, assuming the above can be done, is that such a system would require a great deal of manpower to be enforceable. Even then, there is still the possibility of human error and oversights.
An alternative is to leverage such efforts with technology to foster the consistency necessary to create an efficient environment which is less subject to human manipulation and error. This can only be done, however, when the correct foundation has been laid with a proven system.
Although it may sound too good to be true, such a software exists.
This is precisely what we have created with Radiant.
Radiant is a loan origination software system built around managing fair lending risk. It is a proven system and essentially removes the majority of the fair lending risk from the consumer lending function.
The software application is designed to foster consistency and also create a profitable consumer loan portfolio. Although it heads off a lot of the risk in terms of the lending operation, there are other capabilities as well. It is a robust solution that is flexible enough to fit almost any lender.
Radiant is unique in that it is the only system of its kind as it was designed around managing fair lending risk. For 2018, we have some exciting enhancements coming in our 2.0 release.
How to cite this blog post (APA Style):
Premier Insights. (2017, December 05). Managing Consumer Fair Lending Risk [Blog post]. Retrieved from https://www.premierinsights.com/blog/managing-consumer-fair-lending-risk