Lending institutions play a unique and vital role in helping consumers and businesses recover from heavy economic hardships during the COVID-19 pandemic. Businesses are affected by the pandemic in differing ways: for some it means a slight reprieve in activity and possible opportunity to implement system improvements. For lenders, however, it often necessitates rapidly processing a higher amount of applications and loan servicing requests. While managing their own internal challenges of remote working, branch closings, and employee safety, lenders also need to address the exponentially growing needs of borrowers caused by the pandemic.
INHERENT RISKS ARE RISING
Regulators have been rapidly issuing guidance on how best to manage these challenges. While some of these supervisory directives lighten the regulatory load, regulatory agencies have also highlighted Fair Lending and Community Reinvestment Act (CRA) concerns. Just prior to the Office of the Comptroller of Currency (OCC) finalizing the new rule to modernize CRA, the Comptroller of the Currency, Joseph Otting, stated in an April 9 news release:
Over the last month, as the nation has managed its response to COVID-19, it has become even clearer to me that communities need even more access to lending, capital, and services during this difficult time. It is our intention to craft a final rule that will encourage banks to lend and invest more in the communities they serve, including low- and moderate-income neighborhoods. We seek to increase support to small businesses, small and family-owned farms, Indian country, and distressed areas.
We recommend that lenders update their approach to Fair Lending Risk Assessments in this environment. Key steps should include an examination of increased inherent risks associated with the pandemic. Specific areas where Fair Lending risk is rising include Payback Protection Program (PPP) lending, forbearance procedures, complaint management, and home refinancing application procedures.
PPP PROMPTS EQUAL ACCESS CONCERNS
The Consumer Finance Protection Bureau (CFPB), in a recent blog post, discusses Fair Lending rights and protections for borrowers in relation to PPP. Lending through the program requires balancing many considerations:
- Safe and sound underwriting of applications within tight timeframes;
- Know Your Customer obligations while meeting new customer needs;
- Customer satisfaction maintenance while using limited funds to meet differing needs; and
- Fair Lending risks associated with possible inconsistencies in lending decisions made during a national emergency.
Lenders need to ensure that the priority provided applicants seeking loans does not result in discrimination on a prohibited basis as defined under the Equal Credit Opportunity Act (ECOA) or other relevant statutes. In its blog, the CFPB affirmed that Fair Lending protections are afforded to both new and existing customers. Several members of Congress sent a letter to the Treasury Department and the Small Business Administration (SBA) asserting:
The Paycheck Protection Program is a first-come, first-served program, leaving those without existing bank relationships or lines of business credit at a major disadvantage. People of color are less likely to be approved for a loan, and when they are approved, it is often for smaller amounts with higher interest rates than those offered to similarly situated white borrowers.
These members of Congress further seek to require lenders to report on PPP lending to minority-owned businesses relative to their overall lending through the program. Increased lending activity now, during the pandemic and through the PPP, will be scrutinized for years to come.
TEMPORARY FLEXIBILTY CAN HAVE LONG TERM FAIR LENDING IMPACT
Federal and state bank regulatory agencies issued a joint Press Release on April 3 providing flexibility to mortgage servicers working with borrowers struggling to pay their mortgages due to COVID 19. The agencies state they do not intend to take enforcement action concerning the timing and content of notices required for forbearances, including early intervention and loss mitigation notices, acknowledgment notices, and annual escrow statements. To receive this flexibility from regulators, however, mortgage servicers need to demonstrate a good faith effort to provide accurate and timely disclosures. The agencies also confirm that servicers can offer forbearance or other short-term options to borrowers based on an evaluation of an incomplete application (or even no application at all).
“Good faith effort” is a key concept which will guide future regulatory assessments of lending activity during this time. This phrase is often included in regulatory statements where flexibility is allowed. For example, the CFPB issued a Statement regarding enforcement of the Fair Credit Reporting Act (FCRA) which addressed the challenges credit report furnishers may face due to the pandemic. The CFPB commented:
In evaluating compliance with the FCRA as a result of the pandemic, the Bureau will consider a consumer reporting agency’s or furnisher’s individual circumstances and does not intend to cite in an examination or bring an enforcement action against a consumer reporting agency or furnisher making good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory timeframe.
Lenders then should demonstrate good faith efforts to meet consumer needs as efficiently as possible despite COVID-related challenges. For any situation where you fall short of regulatory timing requirements, clearly document details showing what led to the deficiency and how it was resolved as quickly as possible. Now is an important time to document fully all efforts to respond proactively to the lending needs of your community.
Flexibility and lender discretion can be very helpful in meeting individual borrower needs but can also lead to Fair Lending issues. Lenders should take steps to ensure that the flexibility afforded during this time does not lead to borrowers being treated differently on a prohibited basis. Lenders must apply forbearance terms and conditions fairly across prohibited and non-prohibited basis groups. Written policies should address any changes occurring in the short run, such as processing verbal or incomplete applications for forbearance as currently allowed.
CONSUMER COMPLAINTS PROVIDE INSIGHT
The CFPB blog post also reminded consumers of the online process they can use to file complaints, specifically if an applicant or borrower believes Fair Lending discrimination was involved, stating:
Small business owners who believe they were discriminated against based on race, sex, or other protected category can submit a lending discrimination complaint online. Through our consumer complaint system, companies respond to complaints about consumer financial products and services. The CFPB takes complaint information into account in our supervisory and enforcement work.
The stress of the pandemic may result in increased complaint activity. During late March through mid-April, many consumer complaints related to forbearance procedures, particularly when borrowers were told that lump sum payments would be due at the end of their forbearance period. Along these lines, Fannie Mae and Freddie Mac recently announced COVID-19 deferral payment plans which provide post-forbearance repayment options to help impacted homeowners. Lenders should develop policies and training around these guidelines. In our review of complaint data, we also saw that consumers often complained about waiting an unreasonably long time to speak to a representative and that lending personnel within the same institution often provided contradictory information.
We recommend that lenders have policies and procedures for their staff that is easily accessible and clear. This will help staff members respond consistently to applicants’ and borrowers’ questions. The CFPB encourages organizations to visit its complaint database to gain insight into common complaints, which may lead to regulatory focus. The database provides the ability for institutions to filter complaints by time frame, geographic location, and company name, and may help lenders identify initial concerns before they develop into more serious issues.
MITIGATE RISK WITH STRONG INTERNAL CONTROLS
Another area likely to be strongly affected by COVID 19 and Fair Lending is home refinance lending. As application volume has increased in the context of a relatively low interest rate environment, lenders may have a vulnerability if they do not have standardized procedures in place to handle increased volume.
During this time of COVID-19, a lender may alter some aspects of the application process such as taking advantage of lengthened appraisal timelines or using new methods to analyze or verify income. Before implementing any such changes, institutions should put in place strong internal controls. These controls should include written guidelines and training concerning any changes which could cause disparate treatment among borrowers. Differential treatment provided to consumers based on factors not linked to standardized underwriting policies could cause Fair Lending concerns. Lenders should make notes in loan files which show the reasons for any exceptions to policy which may impact underwriting or pricing. Such documentation will help dispel concerns examiners may have when they review COVID-era decisioning.
Based on our experience, we see that regulators are likely to look for signs that a lender’s board of directors and senior managers are accurately identifying risk and proactively working to control and monitor these risks as they evolve. To generate a positive first impression from examiners, it is vital for lenders to position themselves to easily provide this type of evidence from ongoing compliance efforts. For example:
- PPP lending policies should affirm senior management’s commitment to non-discriminatory lending and to meeting the intent of the PPP program to serve the undeserved.
- Management should also strengthen policies to address consistent outreach and application processes for all applicants seeking forbearance and home refinance loans.
- Management should routinely monitor lending activity in light of the risks noted by public interest groups and Congress members concerning credit availability being equally accessible to all in need.
- Policies and personnel training during this time should focus on compassionate care for struggling borrowers in a manner consistent with safe and sound lending practices.
It is especially important during this time to have compliance managers review any new products or services designed to help consumers during this difficult time. As experts at Ballard Spahr pointed out in a recent Fair Lending webinar, even well-meaning programs can lead to unintentional Fair Lending consequences. For instance, fee waivers, special interest rates, streamlined application processes – any newly initiated program during this time, must be carefully spelled out and monitored for equal treatment of all applicants across the board.
SEIZE THE DAY – BUILD RELATIONSHIPS
This is an unusually demanding time for the lending industry; however, the COVID-19 era also presents unique potential for developing and strengthening relationships with consumers, businesses, community leaders, and regulators. Lenders should swiftly and confidently meet and address the safety and soundness requirements and regulatory compliance conditions that seem to come from all directions at this time. By responding to consumer complaints and meeting the needs of those suffering hardship during this pandemic, lenders are likely to enhance public perception and partnership. These reinforced processes will lead to a smoother road ahead for the lender and community alike.