Fair Lending Examinations March On

In a recent presentation at ABA's National Graduate School of Compliance Management, an OCC official identified several elements that regulators believe banks should include in their fair lending programs. Whether the regulators expect it or not, these elements are important compliance management tools and should be core components of your bank's fair lending compliance program.

There should be supervision of staff involved in lending from reception through underwriting and decision making. The supervision should be designed to ensure that staff understands both the legal requirements that affect their job and the bank's policies and loan products and that they perform their work correctly. In particular, any practices that involve potential fair lending red flags, such as overages or risk based pricing, should receive intense attention.
The bank should have a self-assessment program. This doesn't necessarily mean mystery testing. Many self-assessment methods will provide the bank with an accurate picture. Comparative file analysis should be a core component of any program. If the bank identifies any questions or "appearances" of discrimination, the bank should take steps to fully understand and analyze the transactions in question.
The bank may conduct statistical analysis. (We note that this is particularly relevant in the use of any credit scoring system.) Some sort of data gathering, including that performed for CRA purposes, should be a part of the self-assessment program.
There should be a second review process. Ideally, this should be completed before the bank makes a final decision on the application. Completing the second review prior to the final decision enables the bank to avoid conflicting messages to the customer. It would also minimize any harm that the customer might incur by applying elsewhere at the customer's expense. Perhaps most important, placing the second review before the final decision provides the most open path to the reviewers. It minimizes the tendency to avoid conflict or embarrassment by supporting the original decision.
The program should include a review for compliance with technical requirements of ECOA and Regulation B. Many of the cases of discrimination identified by the bank regulatory agencies are based on findings of technical violations of Regulation B. These technical violations include products or lending policies that fail to comply with Regulation B's rules for consideration of age and income, and the signature rules.

Finally, the program must include training for all affected staff. The training program should ensure that the technical requirements are communicated and understood. Training should also be designed to bring staff up to date on developments in fair lending, such as new ways of applying underwriting criteria. Review training is also important. It is an opportunity to refresh as well as reinforce the bank's policies.