From changes to the Real Estate Settlement Procedures Act to updates within Regulation Z, credit unions have much more to comply with when it comes to their fair lending practices.
So much so that in 2013, the NCUA issued a new Fair Lending Guide that provides information on laws and regulations as well as credit union operational requirements.
The best way to ensure compliance is to complete a risk assessment that addresses available credit, underwriting, pricing, marketing as well as servicing including loss mitigation and collections. The goal is to address any practices that can be considered discriminatory and take the necessary steps towards correction in the event an examiner makes an on-site visit.
By taking a look at where a credit union’s branches are located, the risk assessment can identify underserved or excluded neighborhoods. To reveal any further disparities, analysis of the financial institution’s Home Mortgage Disclosure Act data can provide more insight on potentially “redlined” areas. In fact, the NCUA has said if HMDA data falls outside the normal range for pricing, denials, withdrawals or lending terms when compared to other financial institutions, the credit union is considered a HMDA outlier.
By evaluating how loans are marketed, credit unions can not only pinpoint if certain segments of the population are treated differently but whether consumer complaints have been made. In this part of the risk assessment, a thorough examination of the loan application process may uncover whether the borrower is unknowingly being steered towards products such as subprime loans or adjustable rate loans.
When it comes to the loan pricing piece of the risk assessment process, NCUA and state examiners may exercise more scrutiny if a credit union has moved away from its standard pricing policy. To be safe, policies should do away with lender discretion when it comes to establishing the terms and pricing for loans. Consistency is the key here.
Once a credit union has created a consistent pricing model, the underwriting portion of the risk assessment is a critical area examiners tend to hone in on. Several well-known credit unions fell into conservatorship in part, because of poor underwriting practices. To ensure compliance, credit unions should ensure that there is documentation to back up all justifications for underwriting decisions. The information should be comprehensive, clear and free of any ambiguities.
Another concern to be aware of when preparing for a fair lending risk assessment is the litany of changes that have permeated the lending space. New regulations such as the Consumer Financial Protection Bureau’s qualified mortgage/ability to repay rules require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling, the bureau has said. Creditors are also required to retain evidence of compliance with the rule for three years after a covered loan is consummated. In addition to mortgages, fair lending exams now include small business loans, student loans, unsecured loans, indirect lending and credit cards.
With these expanded areas of review, credit unions should include in plain English underwriting procedures such as how and when credit scores are used, what are the policies on minimum loan amounts, income calculations and collateral valuation.
To make it easier for a credit union to determine if it is operating its loans programs fairly, the NCUA’s fair lending guide sums it up this this way: develop written fair lending policies and procedures; use the risk assessment to identify risks; develop a fair lending policy based on the results of the risk assessment, and be sure to stay up to speed on developments in regulations and compliance.
Finally, the top red flags that will likely ensure a fair lending exam will be conducted by the NCUA include violations noted in safety and soundness exams and identifying moderate or high risk ratings on compliance issues. The regulator has also said it is watching for signs of HMDA outliers as well as other trouble spots including the potential for fair lending risks based on the type of loans, volume, the complexity of products and services offered to members, communities served and most importantly, if discrimination complaints were filed.