The Regulators are on the Fair Lending Warpath
In our business we interact with bankers every day. And what we are hearing from them now reflects a real change in attitude and regulatory focus. Many tell us that their examiners are paying more attention to lending compliance issues, such as fair lending, CRA, and HMDA than at any time in the recent past.
The Assistant Attorney General, Thomas Perez, has recently stated that "lending discrimination is discrimination with a smile and must be stopped." Mr. Perez goes on to say, "the fair lending laws are the most effective way to address this problem and we intend to dust them off and use them to combat this problem". The message is clear; bankers can expect more frequent and more comprehensive fair lending reviews in the future.
As part of a fair lending review, the FDIC and other agencies gather data and build tables and loan pricing matrixes based on race, ethnicity, and gender. If lending disparities are identified, regression analysis is performed to determine if lending discrimination is present. If they determine, through a statistical review, that discrimination may have occurred, they refer the matter to the Department of Justice (DOJ). Once these things are turned over the DOJ, life becomes much more difficult for the bank. The FDIC takes the position that questions referred to other agencies cannot be appealed within the FDIC. However, they do not defer regulatory action related to the fair lending exam. So in addition to the DOJ inquiry, the bank can expect to receive unfavorable CRA ratings and other sanctions that can prohibit other aspects of their operations.
A prudent approach to this increased scrutiny is to be proactive and know what your lending says about your institution... before the examiners do their analysis.
One way to accomplish this is by performing a statistical review of the bank's lending and calculating the originations, denial, and pricing disparities. If disparities exist, dig a little deeper. It sounds daunting, but it is much easier than you think. You can either do this work yourself, purchase software to do the analysis, or outsource it. But regardless of the way you choose to tackle it, the analysis needs to be done at least once a year.
Also, we are hearing that pricing disparity is an area that the examiners are particularity sensitive about right now. The frequency of rate spread loans made to the prohibited basis can be a trigger.
Some institutions use a pricing matrix or guide to ensure uniformity among all loan officers. The key to successfully implementing the pricing matrix comes down to execution and commitment. If you take the time to build the pricing matrix, try not to deviate from it. If you do, make sure a senior manager signs off on the exception. The last thing you need is two different loan officers charging differently for the same loan.
If your bank happens to draw the attention of the examiners, don't wait for them to tell you where the issues are. Do the analysis and review your loan data to support your decision. That will include a thorough review of your lending and may include regression testing. This is not as difficult as it may sound. There are firms that can help with this assessment work including TruPoint Partners.
The regulators are under a tremendous pressure from Congress to be more thorough and proactive in their examinations. Consumer protection is a top priority the current administration and congress. Fair lending, CRA and HMDA are going to be the regulators tools of choice. Bankers need to be aware of the regulators intent and be prepared to address any lending disparities before the examination. Don't get caught unprepared. The risks are just too great.