The landscape of consumer protection is dynamic, but recent emphasis from federal regulators underscores a foundational requirement for financial institutions: the establishment and maintenance of a robust Fair Lending Compliance Management System (CMS). Based on interagency guidance and supervisory findings, regulatory bodies like the Federal Reserve and the National Credit Union Administration (NCUA) are signaling that adequate risk assessments, recurring training, and rigorous exception monitoring are not optional best practices, but rather essential components for preventing discrimination under laws such as the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).
Beyond General Compliance: Tailored Risk Assessments
A significant finding from recent supervisory examinations highlights the deficiency of relying solely on general compliance risk assessments, especially when an institution faces elevated fair lending risk. The supervisory expectation dictates that an institution’s fair lending risk management program must be "commensurate with the size, complexity, and fair lending risk profile of its lending".
For institutions with heightened risk, a general compliance assessment is often considered "inadequate to measure fair lending risk because it is more general and less focused and nuanced". Sound practice dictates implementing a specific fair lending risk assessment that accounts for inherent risks, mitigating controls, and residual risk. These inherent risks should include a review of supervisory history, loan portfolio volume, operational structure (such as decentralization), and market risk, particularly "areas with significant minority populations".
Closing the Gaps: Training and Culture
Another critical area identified for improvement is ongoing fair lending training. Effective and recurring training is deemed an "essential part of a fair lending compliance management program" because "Fair lending risks can change over time".
Institutions often overlook the value of recurring training, particularly for board members and management. The consequence of this oversight can be severe. In a case study noted by regulators, a bank operating across multiple states expanded its mortgage lending, allowing for greater loan officer discretion. Because the bank relied only on a brief general risk assessment and "hadn’t conducted fair lending training in over 18 months," regulators eventually found pricing disparities that the bank’s own compliance monitoring failed to detect.
The resulting conclusion was clear: the ineffective risk assessment combined with the absence of recurring fair lending training left staff "unable to recognize and mitigate emerging fair lending risks".
Effective training, therefore, should be recurring and tailored to specific roles, highlighting current risks, setting clear expectations, and covering prohibited activities with real-world examples.
Monitoring Discretion: The Pricing and Underwriting Challenge
Lending discrimination determinations are based on the totality of circumstances, often focusing on outcomes in pricing and underwriting. When loan officer discretion is permitted, the potential for fair lending violations increases significantly. As such, "When discretion is allowed, it should be monitored to ensure it is not exercised on a prohibited basis, particularly in pricing and underwriting".
The sources highlight specific risks associated with pricing policies, noting that fair lending pricing risk is heightened when:
- The bank gives loan originators "broad discretion to set the interest rate and fees".
- The bank "does not use rate sheets or other pricing guidelines".
- The bank "does not require the loan originators to clearly and consistently document pricing decisions, including exceptions".
- The bank "does not monitor for potential pricing disparities on a prohibited basis".
To mitigate these risks, institutions should either limit or eliminate discretion, or if discretion remains, implement clear exception policies, documentation requirements, and tracking procedures to monitor for disparities. For instance, one case study revealed a bank that failed to establish requirements for documenting all pricing exceptions within its core system, meaning compliance reviews could not verify that adjustments were legitimate competitive offers or "otherwise assess their potential fair lending risk".
Conclusions
In sum, regulatory guidance from the Federal Reserve and the NCUA emphasizes that a strong Fair Lending CMS—built on tailored risk identification, consistent education, and rigorous monitoring of discretionary decisions—is the most effective way for financial institutions to comply with ECOA and FHA and prevent a "pattern or practice of discrimination" that may warrant referral to the Department of Justice.
To help navigate these complex requirements, Premier Insights, Inc. offers specialized solutions focused on Fair Lending Compliance Management Systems (CMS) and fair lending analysis and monitoring. Leveraging 30 years of dedicated service to the banking industry, Premier Insights assists institutions in performing detailed, tailored fair lending risk assessments and implementing controls necessary to monitor pricing and underwriting discretion, ensuring policies are applied objectively across all customer segments.
For additional resources and detailed discussion points on supervisory expectations, please review the slides from the "2025 Fair Lending Interagency Webinar" hosted by the Federal Reserve System’s Outlook Live program here: https://www.consumercomplianceoutlook.org/Outlook-Live/2025/2025-Fair-Lending-Interagency-Webinar/
