A lender’s understanding of the examination procedures established under the Interagency Fair Lending Examination Procedures is vital in establishing a valuable fair lending self assessment program.  Following the same steps for self assessment as in a regulated fair lending examination is key to ensuring fair lending compliance.  This series of articles provides an overview of the fair lending examination process under the Interagency Fair Lending Examination Procedures.

 

 

Once the fair lending examiner has completed the review of the determined focal points and gathered all the information necessary to determine the lender’s fair lending compliance, the results will be made available to the lender. 

 

At this initial results stage, the lender will be given the opportunity to rebut or explain all adverse findings.  The examiner will then review the lender’s response to determine if the explanation provided justifies the apparent fair lending violation. If the examiner does not agree with Lender’s response, a “documented list or discussion of violations, or a draft examination report” will be prepared and the determination will be made whether to undertake enforcement action or if the violations will be referred to the Department of Justice or the Consumer Financial Protection Bureau.

 

The explanations provided by the lender will be made part of the final examination report.  The examiner must include all lender responses and not just those that lender deems the “final” or determines to be the best response.  

 

 

The Examination Procedures Appendix includes guidance for using self-tests and evaluations to help streamline the examination process. If the self-test or evaluation meets the listed requirements, portions of the fair lending examination may be eliminated.  The self assessments must not have occurred longer than two years prior to the exam and must have covered the same “product, prohibited basis, decision center and stage of the lending process” as the regulator’s fair lending examination.  If these requirements have been met, the examination can be further streamlined by ensuring the self assessment:

1. Contained comparative file review;
2. Utilization of the correct control and prohibited base groups;
3. Selection of loans were random or focused on marginal applicants,;
4. Accuracy of data reviewed;
5. Compared borrower treatment and institution judgment for differences on a prohibited basis; and
6. Included a comparison of denied loan prohibited groups to control group approvals.

The self-evaluations sampling sizes must cover the same amount as the fair lending examiner would request to review in order to be used to streamline the examination.  If disparate treatment is uncovered under the self-assessment, the fair lending examiner will also take this information into consideration, determining if the explanations and responses were adequate.  A complete self-evaluation meeting all the examination requirements will be immensely beneficial to lenders facing a regulator’s fair lending examination. 

 

 

The Interagency Fair Lending Examination Procedures Appendix Compliance Management Analysis Checklist may also be utilized by lenders to ensure that their fair lending procedures are compliant.

 

The checklist is broken into two portions: a larger “Preventative Measures” section and the shorter “Corrective Measures” section.  

 

Areas reviewed under the “Preventative Measures” portion include “Lending Practices and Standards” and “Compliance Audit Function”. The “Lending Practices and Standards” section checklist questions are grouped under the following:

1. A review of principal policy issues in underwriting, pricing, referral and consumer complaints.
2. Adequacy of training, pre-processing aids and other guidance relating to ECOA, Regulation B and FHAct prohibited bases and requirements.
3. Specific listed prohibited actions and lender’s training of employees concerning the same.
4. Lender initiative to prevent prohibited practices such as basing credit decisions on assumptions made about a protected class, redlining and reverse-redlining activities. 
5. Ensuring the Lender’s advertisements and marketing initiatives are not biased on a prohibited basis, whether in advert content or in areas in which the advert appears.

Next under the “Preventative Measures” section is the “Compliance Audit Function.” The “Compliance Audit Function” may be utilized by the lender to determine whether their self-testing or self-evaluation program adequately meets the fair lending assessment requirements.  The checklist questions include topics under:

1. Level of transaction review by an independent analyst who reports objective results and produces a written conclusion.
2. Self-test and evaluation processes and procedures of the Lender’s program.
3. The use of control and prohibited basis groups in comparison of borrower treatment.
4. The appropriateness of the collection of information from the borrower for the self-test or evaluation program.

The “Corrective Measures” portion of the checklist includes examples of appropriate borrower restitution where fair lending violations have occurred and the identification and subsequent correction of the lender’s policies and procedures that may have given rise to a fair lending violation.

 

 

The Consumer Financial Protection Bureau (CFPB) is now one of the responsible regulators in the ECOA portion of the fair lending examination and fair lending violation response process.  Most recently  on April 18, 2012 the CFPB has issued a fair lending guidance bulletin indicating the intent to pursue fair lending issues and that the CFPB’s “ECOA Examination Procedures, Mortgage Origination Examination Procedures, and Mortgage Servicing Examination Procedures also adopt and reference the Interagency Fair Lending Examination Procedures.”  

 

The CFPB is also responsible for penalties and enforcement of Fair Lending Regulation.  The CFPB is authorized to launch investigations, issue cease and desist orders or bring litigation, which is unique to the CFPB among the regulators.

 

 

Familiarity with the Interagency Fair Lending Examination procedures will help a lender to tailor their fair lending compliance procedures.  Following the self-evaluation guidance and monitoring fair lending based on the examination procedures is beneficial for ensuring a smooth fair lending nondiscrimination examination.

 

 

The Interagency Fair Lending Examination Procedures and Appendix:

The CFPB’s Supervision Examination Manual:

The OCC’s Fair Lending Comptroller’s Handbook:

http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/fairlend.pdf    

 

Margaret is AVP & Senior Counsel of Bankers Advisory and serves as the firm’s Director of Regulatory Compliance Research.  She received her Juris Doctor from Suffolk University Law School and admitted to the Massachusetts bar.  She serves on the Compliance Committee of the Massachusetts Mortgage Bankers Association. She can be reached at margaret@bankersadvisory.com