On October 21, 2014, the Federal Reserve Board hosted its periodic Outlook Live series webinar, which focused on hot topics in Fair Lending. Presenters from several agencies summarized and shared insights on various areas of focus regarding Fair Lending compliance. Here are some of the main takeaways from the presentation.
Fair Lending risk from target pricing on mortgage products
The FRB is focused on the emerging issue of Fair Lending risk caused by target pricing programs that are a component of compensation plans for loan originators (LOs). Examiners have observed banks that set different target rates and fees for loan originators. Fair Lending risk arises when higher priced loan originators are concentrated in high minority areas, which results in minority groups having systemically higher pricing than nonminority groups.
The LO compensation rule in Regulation Z reduces the Fair Lending risk from the LO level, however, managers, branches and banks that derive compensation or profit based on the price can present Fair Lending risk. Lenders should monitor LO lending based on race/ethnicity using statistical analysis and mapping tools to evaluate their Fair Lending risk exposure from target pricing.
Indirect auto lending will receive greater oversight
The CFPB has been in the news recently regarding new proposed Fair Lending rules for indirect auto lenders. Dealer discretion on consumer interest rates may be a source of fair lending risk. To mitigate this risk, the CFPB recommends:
- implementing a Compliance Management System (CMS);
- limiting allowable discretionary pricing adjustments; and
- compensating dealers in a way that limits discretionary markups.
Due to the lack of demographic information from auto borrowers and lessees, examiners rely on a statistical proxy analysis to estimate the ethnicity, race and gender of each applicant. This analysis helps examiners assess the potential risk of disparate treatment between minority and non-minority groups.
The proposed Larger Participant Rule will expand CFPB’s oversight to 38 auto finance companies that comprise 90% of nonbank auto loans and leases.
Fair Lending risk from maternity leave
The HUD has identified Fair Lending risk from underwriting policies that discriminate against applicants based on maternity leave status. Examiners look for instances in which lenders deny the loan if the applicant is on maternity leave or if income related to this status is excluded. To mitigate this risk, lenders can adopt policies that accept temporary leaves of absence or ignore the status for underwriting purposes.
Fair Lending risk from REO properties
The HUD has investigated lenders for disparate treatment of REO properties based on demographic characteristics of the neighborhood. Fair Lending risk arises when properties in majority white neighborhoods are maintained and marketed in a better manner than properties in majority minority neighborhoods. Lenders must establish a consistent maintenance and marketing program for all REO properties.
Best practices for managing Fair Lending risk
Managing Fair Lending risk requires implementation of an effective CMS that monitors and assesses Fair Lending risk throughout the life cycle of a mortgage. Elements of a strong CMS include:
- adopting clear Fair Lending policies and procedures that cover all products and aspects of the mortgage life cycle;
- establishing expectations and allocating proper resources;
- training leaders and staff on Fair Lending;
- monitoring and testing for Fair Lending compliance;
- taking prompt corrective action;
- conducting Fair Lending risk assessments, comparative file reviews, HMDA analyses and demographic analyses;
- engaging the Board of Directors and management; and
- staying prepared for a Fair Lending examination.