We have discussed previously some general aspects of managing the regulatory fair lending examination process. In this post we discuss one of the most critical aspects: specifically – the criteria interview.
It goes without saying, that any type of regulatory examination should be taken seriously.
This is especially true when it comes to fair lending.
An important distinction of a fair lending inquiry, in particular, is that it is more than just a compliance review, and an outcome that is not in the lender’s favor can have serious repercussions. This includes referral to the Department of Justice and/or a fair lending enforcement action by the DOJ or the CFPB.
One of the critical steps in the fair lending examination process is the opportunity for lending staff to define and explain how loan decisions are handled. This typically takes place in the criteria interview.
The information that is gathered is then used to conduct a fair lending review of loan data whether it be a statistical analysis such as regression or a manual file review (or a combination of the two). This analysis, of course, is conducted by the agency engaged in the review.
It is not possible to overstate the importance of this phase of the review fair lending examination. It is absolutely critical that the lender explain in a comprehensive way what factors are used in loan decisions. The analysis conducted will fall within the confines of what is presented in the interview.
It is, therefore, absolutely essential that all factors be covered accurately. It is equally important to identify factors that are not used as well.
Although this may seem an easy task, many institutions lose ground in this part of the process. There are different reasons for this, but it is often simply taken for granted that staff are familiar enough with how things are done and, therefore, no preparation is necessary. The reality is, however, that this is much more challenging than it may seem.
Below are some suggestions that will aid in ensuring the chance of success:
1. Choose the right staff to participate
The winning combination is to have persons who are both knowledgeable about policies and how things are actually done in practice and who can effectively communicate.
2. Be prepared
Preparation should include reviewing policies and discussing practices to make sure there is agreement so that what will be stated in the interview can be validated.
3. Don’t neglect the obvious
Sometimes the most obvious things are easy to overlook. The examiners will be starting with a blank slate and will want details and specifics, no matter how minor they may seem. Avoid making assumptions about things they may already know.
4. Understand the target product
Once at the criteria interview stage, a product or products will have been selected for review. Make sure the answers given apply to the appropriate product.
5. Be conscious of the time period under review
Often when specifics are asked about lending practices, lenders tend to answer the question in terms of what is being done currently. The time period under review, however, may be a year or more prior. Make sure answers given are accurate for the time frame of the review.
Finally, the above presupposes that an analysis of data has already been done as part of the institution’s fair lending risk management. What is presented in the interview should reflect actual practices. If ongoing fair lending analysis is not part of risk management, this should be corrected sooner rather than later.