Compliance Corner


No Surprises

Six best practices to help ensure positive and predictable fair lending exams

By Edward Kramer

While many community banks of all sizes continue to grapple with various regulatory burdens, fair lending has emerged as one of their most worrisome regulatory concerns. According to the Wolters Kluwer Financial Services’ Regulatory & Risk Management Indicator survey released in March, of the nearly 400 financial institutions surveyed, fair lending risk topped the list for the first time—ranking second only to regulatory risk in general—as their greatest risk management concern.

As federal and state regulators continue their quest to ensure fair and unbiased lending decisions by financial institutions, community banks need to be ready. Community banks are often more customer-centric than larger banks, which means they may likely face heightened scrutiny when it comes to fair lending violations.

Discrimination, with a twist With consumer protection a high-profile issue for regulators, many community banks feel their robust enforcement of fair lending regulations comes with a lack of clarity and arbitrariness about what fair lending standards apply. The increasing use by federal regulatory agencies of so-called disparate impact theory to determine whether a lending institution is committing fair lending breaches has perhaps caused the greatest confusion.

Last year, a community bank in Maryland found out the hard way just how unpredictable regulatory decisions can be in regard to fair lending enforcement. In March 2013, the Office of the Comptroller of the Currency determined that the bank had charged higher loan rates to white men and married couples. After further review, the cause was determined to be a special lending program the bank created to assist minority and women borrowers. The program capped the compensation the bank could receive for loans provided to those particular borrowers.

However, the OCC ruled that the special loan program designed to assist minority and women borrowers resulted in unfair reverse discrimination against other borrowers, and was therefore discrimination under fair lending regulations. The agency also determined that the bank erred when it failed to monitor whether its lending program resulted in unfair treatment of any group of its customers.

One lesson from the OCC’s fair lending enforcement rulings against the Maryland community bank is that banks should not wait for examiners to determine whether their institution has any fair lending problems. The best approach is to proactively and independently conduct regular fair lending risk assessments.

Such fair lending risk assessments should evaluate the entire life cycle of your bank’s lending operations. This process should begin with the marketing and advertising of loan products followed by the application process, pricing, underwriting, servicing and collection, and ending with foreclosure or loss prevention efforts, if applicable.

Fair lending best practices

Wolters Kluwer has identified six principles that can help guide community banks manage their fair lending programs and stay off their regulator’s examination radar.

1. Commitment. Fair lending issues are no longer the sole responsibility of the compliance department, but require a holistic approach that encompasses the entire mission of the bank. It is critical to develop and maintain a compliance culture throughout the organization. Including fair lending responsibilities as part of personnel job descriptions, or providing fair lending news and information to employees on the Intranet or company newsletter, helps keep these issues top-of-mind.

2. Accountability. Make employees accountable for fair lending compliance by incorporating it into the annual employee evaluation process. Other ways to remain accountable are to document actions and outcomes when discriminatory issues are found, and make that documentation readily available to employees.

3. Policies and Procedures. Embed fair lending policies and procedures into your bank’s daily operations. It is important to maintain clear, concise and up-to-date fair lending policies and procedures, making sure your written words match your bank’s actual practices. Also, remember to update policies for new products and new channels. Review and update these policies annually and share them with employees on the company Intranet.

4. Marketing and Advertising. Review any promotional materials presented to potential borrowers or employees for fair lending issues, including marketing collateral, websites, radio or television ads, sponsorships and social media posts.

5. Training. Implement a robust fair lending training program designed for all employees—from new hires to the board of directors.

6. Monitoring. Identify who will monitor the lending products throughout their life cycle. Part of the monitoring process should include setting up a system for documenting complaints to pinpoint any trends or determine if a root-cause analysis is necessary.

The bottom line is that fair lending regulations concern the equitable “treatment” of borrowers. Make sure your community bank complies by treating every loan applicant the same—by providing the best customer service and offering the same products to everyone who walks in the door.

Edward Kramer ( is executive vice president of regulatory affairs for Wolters Kluwer Financial Services in Minneapolis.