In a perfect world, fair lending issues are prevented, and banks remain in compliance with fair lending laws. But, reality being what it is, people are human, mistakes are made, and things are sometimes overlooked.
One of the many quandaries an institution faces in that situation is what the appropriate response and action to take actually is. There is of course no generic answer for this, as each situation will vary considerably with its own nuances, but regulatory guidance does offer some answers in this regard.
Let’s examine some of them.
- Offering Credit that Was Improperly Denied: If a bank is found to have improperly denied a loan application due to discrimination, it may be required to offer credit to the applicant. This ensures that the applicant has the opportunity to receive the loan they were unjustly denied.
- Compensating for Damages: Banks may be required to compensate victims of discrimination for any damages they incurred as a result of the discriminatory practice. This can include both out-of-pocket expenses and compensatory damages for the harm caused. If this is warranted, the focus should be on making the customer whole.
- Notifying Consumers of their Legal Rights: Banks may be required to inform consumers of their legal rights related to fair lending. This ensures that consumers are aware of their protections under the law.
- Correcting Policies and Procedures: A key corrective action involves revising any policies and procedures that led to the discriminatory practices. This includes:
- Ensuring that underwriting practices are clear, objective, and consistent.
- Making sure that pricing is within reasonably confined ranges, with clear guidance on how variations are linked to risk and cost.
- Establishing clear and objective standards for referring applicants to subsidiaries, affiliates, or different lending channels within the institution.
- Guaranteeing that denial reasons are accurately and promptly communicated to unsuccessful applicants.
- Addressing vague or subjective criteria to ensure fair and consistent application of standards.
- Reviewing and revising any standards or procedures that changed during the review period.
- Ensuring all guidance, including that which relates to allowing exceptions, is provided to lending staff, and how discretion or exceptions are documented and tracked.
- Training and Disciplining Employees: Banks may need to provide additional training to employees involved in the discriminatory practices. In some cases, disciplinary action against employees who engaged in discriminatory behavior may also be necessary. This helps prevent future violations.
- Implementing Community Outreach Programs: In cases of redlining or other forms of discrimination that affect specific communities, banks may need to implement community outreach programs. These programs can help to better serve minority segments of the institution’s market and address previous discriminatory practices.
- Changes in Marketing Strategies: Banks may have to change their marketing strategies to ensure they are not discriminatory and reach all segments of the market. This could include adjusting advertising content, media choices, and outreach efforts.
- Improving Audit and Oversight Systems: Banks need to improve their audit and oversight systems to ensure that identified discrimination does not recur.
- Addressing Root Causes: Banks must identify and address the root causes of discrimination. This might involve:
- Analyzing loan officer or broker compensation programs that create financial incentives to charge higher prices or place applicants in specific products.
- Examining whether financial incentives for loan officers or brokers are tied to placing applicants in non-traditional or higher cost products.
- Eliminating explicit demarcation of credit product markets that exclude certain geographic areas.
- Addressing Disparate Impact: If a neutral policy or practice has a disproportionate adverse impact on a protected group, the bank needs to:
- Demonstrate that the policy is justified by business necessity and that there are no less discriminatory alternatives.
- Adjust the policy to reduce its discriminatory impact, if an alternative is available.
- Fair Lending Self-Testing: Banks can use self-tests and self-evaluations to identify and correct fair lending issues. Examiners may streamline the examination if an institution has conducted reliable self-evaluations or self-tests. The report, results, and many other records associated with a self-test are privileged unless an institution voluntarily discloses the report or results or otherwise forfeits the privilege.
- Compliance Management System (CMS): Banks should ensure that their CMS is effective in controlling fair lending risks. This includes controls in credit application and decision-making, property valuation, pricing, complaint resolution, and third-party oversight. Any assessment of the effectiveness of the bank's CMS in mitigating fair lending risks will be documented in Section 2 of the FLSC.
- Correcting Data Inaccuracies: In cases where data inaccuracies impede the examination, banks are directed to take action to ensure data integrity. This includes data scrubbing, monitoring, and training.
- Addressing Employee Statements or Practices: If employees have made discriminatory statements or are engaging in discriminatory practices, banks must address these situations to prevent ongoing issues.
These example corrective actions are aimed at not only rectifying past discriminatory practices but also preventing future violations and ensuring fair access to credit for all. The specific actions required will depend on the nature and severity of the violations.
