The sixth C of credit: compliance

To boost their community bank’s compliance efforts and build trust with their regulator, loan officers may find it helpful to think about their next loan like an examiner would.

By Mary Thorson Wright

A responsible lending program should cover the six Cs of credit. You heard that right: six.

Loan officers learn about the five Cs of credit: character, capacity, capital, collateral and conditions. The sixth is compliance—fair lending compliance, in particular. Fair lending compliance goes well beyond accurate paperwork and checked boxes. It can reflect favorably or unfavorably on overall management competence and organizational culture.

Community banks must make financially sound loans and adhere to the letter and spirit of fair lending regulations. Confirming compliance takes macro and micro analyses of bank practices much like those performed before and during examinations, such as board oversight, risk assessment, training, monitoring, complaints, testing, vendor risk and lending policies. Is that enough?

Baseball great Yogi Berra once said, “If you don’t know where you are going, you might wind up someplace else.” And if you don’t know where you are, it’s tough to know where you need to go. So, before you begin racing through mortgage loan files to see if the boxes are checked and to collect consumer ethnicity and race data, do what your examiners do.

First, get familiar with your community bank’s fair lending program and get a good understanding of your bank’s size, complexity, products, business model, and legal or operational limitations.

Next, review your community bank’s fair lending history by looking through the results of past examinations, monitoring, audits and corrective measures.

Then, establish a baseline for your upcoming work by reviewing the fair lending risk assessment and updating it, if necessary. What policies, procedures or products have changed or have been implemented since your bank’s fair lending history was last reviewed? What training has been conducted, to whom was it presented and what records were kept?

Get the picture? That’s the point.

Evaluation criteria

What steps do examiners take to evaluate a community bank’s fair lending practices? It may be one of the world’s worst-kept secrets. Publicly available resources are peppered with valuable information about the scope and process of fair lending evaluations. Some might immediately come to mind, such as the Interagency Fair Lending Examination Procedures and Equal Credit Opportunity Act (ECOA), or reviews of Home Mortgage Disclosure Act (HMDA) data for accuracy, omissions and lending patterns.

Others might come from outside the box. For instance, the FDIC offers a course to train examiners on technical aspects of the Fair Housing Act (FHA) and ECOA, and how to conduct a fair lending examination. Key objectives for the training include:

  • measuring risk from underwriting, steering, pricing, redlining and marketing
  • conducting comparative file analysis
  • evaluating management’s responses to apparent differences in treatment.

Although the instruction is not available to the public, the course description may point community bankers to areas that need attention.

Similarly, in its Consumer Compliance Supervision Bulletin released last year, the Federal Reserve Board published a robust discussion of its supervisory observations regarding fair lending in the areas of redlining, pricing and underwriting. The bulletin covers key risk factors of fair lending, such as the Community Reinvestment Act (CRA) assessment area, lending record, branching strategy, complaint management, and marketing and outreach strategies. It focuses on enhancing bankers’ understanding of common fact patterns and emerging risks so institutions can better manage risk, and the information can be of value regardless of a community bank’s primary federal regulator.

Culture counts

Beyond technical violations, regulators look for an overall compliance culture that supports fair lending practices, including board of directors’ oversight, proficiency and consistency in individual lines of business, and the breadth and depth of the compliance management function. Fair lending findings and nontechnical information gathered during an exam, such as the knowledge and confidence of community bank staff, create a picture of the compliance management system (CMS), the extent to which the culture supports compliance and the ability of management to effectuate ongoing compliance.

Each federal regulator has published its expectations for banks in implementing a thoughtful, current and effective CMS, including self-management of fair lending training, monitoring, testing and corrections. ECOA’s Regulation B specifies that results of voluntary self-testing are privileged if the creditor has taken appropriate corrective action. To that end, self-testing and self-correction for fair lending requirements can benefit community banks.

Try the examiner approach. Know where you are and where you need to go, then use the tools designed to evaluate fair lending compliance. You could up your community bank’s fair lending compliance game and contribute to your regulator’s confidence in the program.


Mary Thorson Wright, a former Federal Reserve examiner, is a financial writer in Virginia.

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