Fair Lending-The Next Four Years

In the last four years, we have seen significant developments in fair lending. It is time to ask what we know and where we go from here. As this issue's article on DOJ's most recent case illustrates, although we continue to get clarifications on what is prohibited, we still have little certainty as to what is right.

Clearly, it is not safe to look to a recent "clean" examination or internal audit and feel comfortable. Fair lending is a constantly changing subject area. Recent years have proved that. Each agency charged with enforcing fair lending laws is working with, and changing, their procedures for investigation. The agencies are also changing the types of credit activities and products they investigate. As regulatory agencies and the Department of Justice study different types of lender behavior, they generate new theories about what is permissible and what violates the laws. As a result, a recent "clean" exam or audit may not even have looked at the practices that will come under scrutiny in your next examination.

Given the results of the recent election, fair lending issues are still with us. We should not expect to see any significant deviations in the administration's policy on fair lending. While we may look for some additional regulatory burden relief from Congress, that is not likely to affect fair lending laws in any significant way. After all, the opposite of fair lending is not acceptable as public policy. There will be some future safety for self assessment and corrective actions. The FRB and HUD will be issuing regulations to implement the new protections for "self-testing", although we don't yet know how those agencies will define self-testing.

In the meantime, it is essential to remain vigilant. Whether protected or not, self-assessment of fair lending performance should be a fundamental part of your compliance program. The self-assessment should involve a careful analysis of underwriting and other lending practices, lending decisions, and the pattern of results.

In this issue, we have given you advice on the latest important steps to take. This is our best advice based on what we know today. However, based on experience, we know that the most certain aspect of fair lending is that what is correct and what is enough constantly changes. Careful management for fair lending should therefore include two things. First, be ready. Study the present for trends and watch the horizon to predict what is coming.

Second, it is essential to truly understand your institution's business and lending results. Understanding the business and business strategies will be essential to explaining and defending the lending patterns. Know what your bank is doing and what it means.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 17, 11/96