Inaccurate information held by organizations regarding fair lending risk management can hinder them from successfully managing that risk. Today, we’re looking at five prevalent expectations within the industry and the reality for each.
Expectation #1: Written policies ensure that an organization doesn’t need to worry about fair lending because it’s entirely protected.
Reality: Although it’s a good start to have written policies in place, proper management of risk shouldn’t stop there! Regulators expect that these policies and procedures are consistently monitored and reviewed to verify that they’re being properly practiced.
Expectation #2: When managing risk, an organization should only be concerned about the underwriting process.
Reality: Fair lending risk doesn’t only reside at the forefront of the lending process but within the entirety of the credit transaction. According to the Equal Credit Opportunity Act (ECOA), “A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction.” Fair lending risk resides in different areas of the process including marketing, redlining, and servicing or loss mitigation risk.
Expectation #3: The marketed region of an organization isn’t diverse, so fair lending isn’t an issue.
Reality: According to the ECOA and Fair Housing Act statutes, discrimination in reference to age, sex, race or color, religion, national origin, marital status, applicant’s receipt of income, familial status, or handicap is prohibited. On the basis of this description, any marketed region would contain a diverse population.
Expectation #4: Organizations should only focus on HMDA data for fair lending.
Reality: Although most fair lending analysis begins with Home Mortgage Disclosure Act (HMDA) data, Interagency Fair Lending Exam Procedures include an analysis of discrimination factors for consumer and commercial lending. Since the ECOA encompasses credit transactions and isn’t merely HMDA, understanding HMDA reporting is key to fair lending but not the only thing organizations should focus on.
Expectation #5: Fair lending compliance guidelines don’t apply to small community financial institutions.
Reality: Tackling fair lending risk includes awareness of where that risk is and how to get rid of it. Numerous factors, such as market diversity and loan volumes, impact a Fair Lending Risk Assessment. The ECOA and Fair Housing Act apply to all financial institutions, regardless of asset size or loan volume.
ComplianceTech has decades of experience in the financial services industry. Don’t neglect your fair lending compliance—contact our team today by visiting us online and find out how we can help you stay up-to-date on the issues that matter to you.