The Smart Compliance Blog

It’s no secret that fair lending is an ethical imperative as well as a regulatory mandate. And passing your fair lending exam isn’t optional! A negative outcome can compromise your institution’s reputation and impede its growth. Given all that is at stake, your institution must deploy a smart strategy to ensure positive results.

Articulate Your Risk
Before any exam ever begins, your institution should conduct its own fair lending risk assessment. Understand you numbers by running or having statistical analysis run of current and past lending activity. Taking an objective look at your underwriting processes and outcomes can also provide valuable insights. Seeing the types of fair lending risk to which your institution is most exposed, and evaluating the effectiveness of the controls you use to reduce those risks, is the first step to being prepared for an exam. Examiners will ask whether you have done an assessment. If so, and it’s deemed reliable, examiners may skip developing their own.

Know The Rules
By knowing how the exam process works and how you will be evaluated, you can better prepare your team for the examination experience. The publicly available Interagency Fair Lending Examination Procedures http://www.ffiec.gov/pdf/fairlend.pdf provide precise, step-by-step instructions that examiners follow in conducting exams. Knowing how things will be done, from scoping and deciding focal points, to running statistical analysis, all the way through reviewing files and drawing conclusions, helps you assess how the examination is progressing from start to finish.

See What They See
The best approach to knowing how your exam will turn out is to conduct one of your own. Using the Exam Procedures as your guide, replicate the work steps and conduct your own mock exam. Caution is advised in undertaking this process, because it may be considered a “self-test” that produces new data. A “self-test” must be handled in a particular way in order to preserve its confidentiality and prevent its disclosure to examiners. Since results aren’t known until the review ends, protecting results is a prudent step. If you lack expertise or qualified resources in this area, a third party can help you identify best practices for such reviews.

Knowledge is Power
Employing these strategies can help you know what to expect in your fair lending exam. By arming yourself before the examiner comes calling, you can respond efficiently and effectively throughout the exam cycle. Proper preparation can lead your institution to more positive outcomes and favorable exam results

Since the inception of HMDA and CRA, bankers have grumbled about the effort and expense required to collect and report their lending data. Even with the advent of automated methods for capturing and reporting, this data has been viewed by all but an innovative minority as something done merely to “comply.” For those willing to seek a different perspective, this data represents an untapped marketing resource you can mine with little or no additional expense.

The HMDA Mother Lode
Your institution’s home mortgage lending data reveal a wealth of demographic information.
Not only does it show where you are and are not lending, but it also shows the characteristics of borrowers who are approved versus applicants who are denied, as well as those who fail to complete the application process or withdraw their applications. By plotting this information graphically and numerically, you can analyze it to gain insights such as:

• Borrower and applicant race, ethnicity and gender
• Percentages of loans made to individuals versus jointly
• Specific neighborhoods where you receive few applications
• Neighborhoods that produce a lot of applications
• Average time from application to decision

You should know what various data fields on the HMDA report represent, and how relating them to one another can shed light on where and how your marketing efforts are working (or not). This type of review can also illuminate pockets of additional opportunity for your bank.

The CRA Gemstone
CRA data can provide a roadmap for seeking out new commercial relationships. Knowing how many small business and small farm loans you have made – where, when and to what size enterprises – can enlighten and inform future marketing efforts. If you have had success in a particular market sector, you can build upon it. Knowing where your efforts have been less effective might indicate a need for greater outreach or a change in messaging. Benchmarking your data against your peers can also help your executive team and Board of Directors adjust and refine your competitive strategy.

The Lucky Strike
Finding novel applications for the data you are already collecting distinguishes you from your competition. Not only does it make productive use of otherwise burdensome requirements, but it holds a wealth of information that can inform your business decisions. Using your data for more than “just compliance” can be the lucky strike that energizes your institution’s marketing programs.