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Your fair lending analytics can be shaped by context

Niall Twomey, Kate Gutierrez-Wilson
4/27/2023
Your fair lending analytics can be shaped by context

Data analytics can be a powerful tool, but only when people with deep expertise interpret the results and translate them into action.

Financial services companies can’t afford to get blindsided by fair lending risk. A single regulatory violation or negative headline can erode customer confidence of your customers, damage reputations, and result in fines and penalties.

The challenge is that many organizations might not know about their most significant sources of fair lending risk. Recent discussions and industry updates have pointed to a need for more understanding of nontraditional business models, including wholesale funding situations or working with fintechs. From the models to pricing and underwriting decisions, many financial services companies have not incorporated those risks into their fair lending monitoring and testing programs.

To try and quantify these unknowns, more organizations are using data analytics to identify fair lending risk. Data analytics tools can provide quantitative data related to banking practices, highlighting the gaps and risks in lending patterns and fair lending compliance efforts.

However, it’s important to understand the limitations of data as well as the benefits. Data analytics software can analyze data, but it can’t interpret the results and translate them into a practical, comprehensive fair lending compliance strategy. Human expertise, experience, and perspective are required to turn data analytics results into effective action.

Data analytics is a launching pad to help identify fair lending risk

Data analytics is a launching pad to help identify fair lending risk

Fair lending and redlining analytics can help organizations become stronger and more resilient by:

  • Uncovering risk within the organization
  • Uncovering risk with third-party partnerships
  • Identifying the correlation of nontraditional underwriting models to protected groups
  • Offering valuable insights about the customer base
  • Benchmarking against peer organizations

However, data analytics only provides a partial story of any financial services organization’s fair lending services. A software platform helps collect, organize, and analyze a vast amount of information, but data analytics alone won’t be able to fill in some potential gaps. For example, data analytics cannot:

  • Provide loan policy information or underwriting inputs
  • Show in-person discouragement or steering performed by a sales team
  • Provide complete visibility into each individual loan and why it was approved, declined, or withdrawn, which is often the bigger risk

Fair lending analytics can help proactively identify risk areas, but a subject-matter specialist is often needed to provide the necessary context and paint a clearer picture of fair lending practices and surrounding geographies. With regulators consistently scrutinizing data, organizations need to stay one step ahead.

As powerful as data analytics can be, the human element is critical

As powerful as data analytics can be, the human element is critical

There’s more to fair lending compliance than just checking boxes and reporting. Software tools can apply useful fair lending analytics to data, but that data can’t recommend actions. Adequately mitigating fair lending risk is difficult if organizations don’t know what the data means or how to follow up on indicators received. In some instances, action based on an incomplete understanding of the data can create even more risk and derail a fair lending strategy.

Organizations must also account for proper context that affects their fair lending data analysis. For example, customer demographics for a bank in an urban environment might vary greatly from a bank based in a rural area. If only raw data is considered, a potential violation might be misidentified since the banks are drawing from customer bases that differ greatly in race, ethnicity, income, and geography.

Data analysis can also be segmented to compare similar risks and practices across different products and services. That analysis can take into consideration the underlying business decisions that need to be made for a risk-based approach.

Organizations might benefit from the expertise of someone who can translate fair lending analytics into practical business language that provides meaningful recommendations and activities to help manage potential risks before they arise. Consumer compliance consultants who know the regulatory expectations of the banking industry and can uncover anomalies in fair lending analytics might even be more valuable than a strong data analytics platform that isn’t paired with the right expertise.

Crowe can help you take a holistic approach to fair lending compliance

Crowe can help you take a holistic approach to fair lending compliance

The fair lending landscape has changed quickly in recent years between redlining concerns, the implementation of Dodd-Frank Section 1071 fair lending requirements, and the expansion of data collection efforts to small business customers. The rapid pace of change will likely continue, so a financial services organization’s risk management function must be ready to adapt quickly and focus on incorporating the new fair lending compliance requirements.

Crowe fair lending risk specialists can help your organization keep pace by strengthening your reputation and implementing strategies for growth. We combine fair lending analytics tools with deep banking industry experience and regulatory knowledge to help you accurately assess fair lending risks and develop the policies and procedures to address them.

Ready to strengthen your fair lending program?
We can help you both apply and interpret data analytics for a stronger, more efficient program.
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If you're ready to combine fair lending data analytics with deep expertise and regulatory knowledge, let's talk

If you have questions about how data analytics can combine with deep expertise to improve the effectiveness of your fair lending compliance efforts, get in touch. We’d love to have a conversation.
Niall Twomey
Niall Twomey
Principal, Financial Services Consulting
+1 630 574 1806
Katie Gutierrez
Kate Gutierrez-Wilson
Financial Services Consulting
+1 404 495 7118