Even if you think your organization is serving customers in an ethical manner and diligently addressing areas of need, it’s fair lending data might be telling regulators a different story.
It’s important to proactively assess fair lending risk. Banks often forget to ask five critical questions that potentially can have a negative impact on their brand, drive away customers, or result in fines or penalties.
Organizations can get into trouble by omitting their marketing efforts from fair lending risk assessments. And if a marketing strategy is developed without a fair lending evaluation, then risks actually might be built in. For example, an advertisement for bank services can seem innocuous at first glance, but if it’s distributed only in certain geographical areas with nondiverse populations or if it appears in media that only serves a narrow audience, then the marketing campaign is setting the stage for fair lending risk.
A bank’s marketing efforts also can extend beyond traditional tools such as ads, email campaigns, and billboards. Targeted marketing efforts using data analytics are becoming more popular with many banks, but you’ll want to be careful that you’re not using the information to target certain groups at the exclusion of others. Carefully analyzing the fair lending risk implications of how to market products and services will help you treat your customers fairly and equally. Even something as simple as marketing to your existing customer base could create risk if it’s not diverse enough, and it might be a sign that fair lending risk already exists in your organization.
Many banks forget or exclude fair lending risk implications from their model evaluations. Outlining all the different models your bank uses – from pricing and underwriting to geography and demographics – and determining the fair lending impact is critical to confirm you aren’t missing areas of risk. You can review model variables and their weighting to see if they have excluded protected classes or given any variables less weight.
Not only is it a good idea to review your bank’s model inventory for accuracy and consistency, but you also might want to include a fair lending viewpoint into your model governance program to help make it more robust. It’s important to understand internal models as well as external third-party vendor models, analyze both pricing models, and evaluate potential fair lending risk outcomes.
The number of third parties that banks rely on to deliver products and services is increasing every year. That’s why monitoring the actions of partners such as fintechs, indirect lenders, brokers, and agents during your fair lending risk assessments is important. Banks should ask questions such as:
These questions can help illuminate how third-party business practices can travel back to your bank, affect your fair lending risk, and play a role in how you assess potential new partnerships.
Customer complaints can easily fall through the cracks if they aren’t making their way to your risk and compliance team. Thoroughly examining what your customers are saying can help you mitigate potential fair lending risk and identify areas where the customer experience can be improved.
Your fair lending risk assessments should regularly analyze customer complaints to identify trends such as disparate treatment, discouragement, or steering. Once you locate areas of potential fair lending risk, your bank will be able to take proactive steps to better serve all its customers.
Your bank’s sales practices have the potential to affect fair lending risk in several ways. Fair lending risk assessments related to race, religion, and gender should be in place to ensure customers are treated fairly and ethically. But analyzing additional sales behaviors could help avoid potential violations.
Banks should ask questions about the sales process such as:
By continually monitoring the level of service your bank provides to customers, you can address any anomalies before they have a chance to surprise you and create unwanted consequences.
Every potential impact you can identify as a source of fair lending risk can get you one step closer to better risk management. Crowe specialists combine powerful data analytics tools with practical industry experience to assess your fair lending risks and can help you develop policies and procedures that address them.
