Why your fair lending risk arrow is probably pointing up

Clayton J. Mitchell, Niall Twomey
4/9/2021
Why your fair lending risk arrow is probably pointing up

Often, whether an organization is complying with fair lending practices can seem to lie in the eye of the beholder. Outside of a few very distinct requirements for notifications and communications, fair lending laws reference principles such as fairness and equity without precisely elaborating how those principles should be interpreted.

Because of this lack of elaboration, the enforcement of fair lending laws can involve a degree of subjectivity. Even the prohibited bases for lending decisions have changed over time and continue to vary based on the specific regulation.

For companies in the banking industry, subjectivity and unknowns can create confusion and lack of confidence. And with fair lending in particular, the inherent subjectivity means that fair lending risk tends to rise and fall in waves as enforcement priorities change and public attention comes and goes.

Right now, fair lending risk at most financial services companies is rising due to new enforcement policies and consequences of the COVID-19 pandemic. But assessing your company's risk can become a business opportunity instead of a compliance burden if approached in the right way.

The new administration has indicated fair lending enforcement is a priority.

The new administration has indicated fair lending enforcement is a priority.

During his campaign, President Biden expressly stated that he would “ensure effective and rigorous enforcement of the Fair Housing Act and the Home Mortgage Disclosure Act.1

Daniel H. Burd, a Washington, D.C.-based attorney who focuses on regulatory matters for financial institutions, authored an article in the National Law Review shortly after the November 2020 election in which he suggests that under President Biden, the Department of Justice likely will increase enforcement action in various bank-related areas, including consumer statutes and regulations that make up the fair lending body of law.

“It can be considered certain that a change to more aggressive fair-lending enforcement – and to regulation by enforcement – will follow quickly upon the Biden inauguration,” Burd wrote.2

More recently, in a further signal that the Biden administration intends to follow through on its campaign messaging, the Consumer Financial Protection Bureau (CFPB) assembled a new enforcement team and embarked on a hiring spree.3

This activity should motivate companies in the banking industry to reassess their fair lending compliance efforts and prepare for possible regulatory changes to follow.

The pandemic has pushed financial services companies to make difficult business decisions with complex consequences.

The pandemic has pushed financial services companies to make difficult business decisions with complex – consequences.

During the COVID-19 pandemic, many organizations have focused on helping individuals and families weather the resulting financial crisis. Some companies in the banking industry have offered payment holidays and other relief measures for borrowers.

These types of relief measures create another layer of fair lending compliance since they’re subject to more stringent rules and regulations regarding fair and equitable distribution. If a lender does not comply and fails to make relief measures available in an equitable manner, the lender could face regulatory penalties. It also could find itself on the receiving end of public backlash.

Just like with other types of lending decisions, seemingly innocent decisions regarding payment holidays can easily run afoul of fair lending laws. For example, disparate impacts could come from payment holidays that apply only to new vehicles or loans over a certain amount.

Financial services companies have suffered the economic effects of the pandemic, too. Many banks and credit unions have closed branches or considered the option. But every branch closure, no matter how straightforward the business case behind it, creates the opportunity for disparate impacts in terms of banking access that could draw fair and responsible banking red flags.

Fair lending compliance doesn’t just satisfy regulatory requirements – it creates opportunities.

Fair lending compliance doesn’t just satisfy regulatory requirements – it creates opportunities.

The good news is that assessing your fair lending risk is a win-win proposition. Every potential disparate impact you identify is a source of fair lending risk and a step closer to better risk management. So, consider thinking of fair lending compliance as a business opportunity instead of a regulatory burden.

The most critical step toward getting a handle on your fair lending risk is to develop a strategy. And before you can create a strategy, you need a goal.

Your organization should ask questions such as:

  • What are our business objectives?
  • Based on our past, current, and future objectives, what is our organization’s appetite for fair lending risk?
  • What outcomes do we want?
  • What commitment are we willing to make?
  • Do we have specific pricing structures or programs that create unintended risks?
  • Are we overly accommodating to our current customer base?
  • Do we make too many pricing or underwriting exceptions that create additional risks?
  • Do our marketing practices take fair lending into account?
  • Do we want to become an organization that leads the curve in corporate and social responsibility and sees that as a competitive advantage?

Whatever goals you set, you need to follow up with careful and strategic investments of time, money, and work to achieve your vision. Being a leader in inclusion, meeting the needs of impacted communities, and driving community development all require commitment and devotion of resources.

Let's connect

Changes in the fair lending landscape move fast, but so do Crowe fair lending risk specialists. We combine data analytics tools with deep banking industry experience and regulatory knowledge to help you assess your fair lending risks and develop the policies and procedures to address them. Get in touch with us, and let’s start a conversation.

1"The Biden Plan for Investing in Our Communities Through Housing," Joe Biden Campaign, https://joebiden.com/housing/

2Daniel H. Burd, “Fair-Lending Enforcement Under the Biden Administration – the Return of Disparate Impact,” National Law Review, Nov. 19, 2020, https://www.natlawreview.com/article/fair-lending-enforcement-under-biden-administration-return-disparate-impact

3Kate Berry, “CFB Goes on Hiring Spree as It Looks to Ramp Up Enforcement,” American Banker, Feb. 21, 2021, https://www.americanbanker.com/news/cfpb-goes-on-hiring-spree-as-it-looks-to-ramp-up-enforcement

Contact us

Clayton J. Mitchell
Clayton J. Mitchell
Managing Principal, Fintech
Niall Twomey
Niall Twomey
Principal