Practical Advice On Managing Fair Lending

Pat Ryan has been in the trenches with fair lending issues. Now with Fleet Bank's credit card operation, Ryan managed compliance for Fleet Mortgage Company through several fair lending examinations and investigations.

From that experience, Ryan advises banks to be pro-active and manage fair lending to avoid the fair lending traps. This sounds easier than it is. With fair lending, there is no certainty. Fair lending can't be quantified or calculated in the way you calculate APRs. It is a constantly changing set of concerns and practices that must be managed.

Ryan identifies several problem areas to watch. These issues and practices can change over time so always stay tuned to fair lending politics.

First, look for any imposition of more onerous terms on a prohibited basis. Both file comparison and statistical analysis can identify this problem.
Second, watch for any redlining. This means both identifying redlining opportunities in your market and reviewing underwriting and appraisal procedures. Also always look for actual practices, just in case lenders are not following the company's stated procedures.
Third, look for any low appraisals. Be especially alert for any appraisals that seem low relative to market prices or that contain any double discounting - deductions taken from the property value after market comparables have been considered. Ryan recommends that banks use language in their agreements with appraisers to require compliance with fair lending laws. This clearly places the responsibility on the appraiser to use appropriate principals, methods, and language for the appraisal. This agreement won't guarantee you freedom from any liability but it shows that you are managing your program and it gives you leverage with the appraisers.
Fourth, give attention to any opportunities to, or patterns of, discouraging applications from applicants on a prohibited basis. In fact, any discouragement, however "well intended", should be considered illegal. Make clear that any discouragement is contrary to your bank's policy.
Fifth, review your underwriting criteria for any unwarranted loan qualification standards. Be sure that no one is using - either blindly or by intent - any loan underwriting criteria that has a disproportionate impact without a clear and over-riding business necessity.
Sixth, review how your institution treats delinquencies and defaults to ensure that there are no uneven loan collection standards. Collection practices are clearly covered by both the Fair Housing Act and the Equal Credit Opportunity Act. Collection practices as well as how creditors consider late or slow payments are now getting attention from advocacy groups. Ryan reported that Fleet was actually accused of using inconsistent collection standards on a prohibited basis. The bank then had to go in and identify its actual practices. The bank found that unequal collection practices were not actually happening, but the bank learned the importance of giving attention to all aspects of the lending process from application through to collections.
Finally, review your bank's marketing to ensure that the bank does not create a racially exclusive image. Marketing will get intense attention in the new fair lending examination procedures. Not only will examiners look at the marketing materials themselves, they will look at whether the applications received represent the demographic mix in your market. Any disparities will lead questions about the bank's marketing practices and the image that the bank projects.

Best Practices
Ryan recommends a series of best practices to manage fair lending and minimize the risk of complaints or lawsuits.

Training is a foundation for everything in the fair lending program. Training also provides the foundation for any disciplinary action. The bank needs to be able to say that it gave the employee the information and tools to comply and to perform the job correctly. Then the fact that the employee didn't comply is the employee's responsibility.

Other best practices relate to employment policies. For example, the bank should make efforts to achieve employment diversity. Ideally, the bank's employees (at all levels in the bank) should be representative of the communities the bank serves. A benefit of employment diversity is that it helps the bank to understand the community, its issues and customers.

Also consider how the bank compensates employees and what it motivates your loan officers to do. What choices does the compensation structure lead lenders into making and does it result in fair lending or something else?

Constantly review underwriting to ensure that it is accurate, effective and does not have a disparate impact in your markets.

Encourage your bank to develop alternative loan products. These should be responsive to the specific credit needs in your markets. Don't simply copy other programs that may not be appropriate in your markets.

Maintain a second review program. This should specify what loans will be looked at and what will be done if any issues are identified. It can be useful to track how many decisions get reversed in second review. If the number is high, look at what might be wrong with the original lending process.

Take a close look at your marketing. Look both at the marketing materials themselves and at any marketing strategies. Of particular concern is any targeted marketing that omits or excludes groups in your market on a prohibited basis.

Customer credit counseling can be an effective way to bring applicants up to a level to qualify for credit. If you participate in credit counseling programs, be sure that your staff knows when and how to refer applicants. Cover this in training. Also, be sure that the credit counseling services are reputable and effective.

If you are using any third parties - such as mortgage brokers or dealers - know who you do business with. Check out their policies and practices. Also, ask them to sign an agreement that they will do business in compliance with the fair lending laws.

Finally, as a practical matter, fair lending self-assessments are now a requirement. The assessment is no better than the corrective action that the bank takes. Always be prepared to do something with your results.

ACTION STEPS

Review the Best Practices for fair lending. Decide which practices you should have in place. Also determine the precise structure for the practices.
Make a list of any special fair lending issues in your market or markets. Use this list to set your program priorities.
Put a note on your calendar to check these program elements every 4-6 months to make sure that your fair lending program is up-to-date.
Develop an action plan using the fair lending program elements described in this article. Put the steps on your calendar and get going!