Written by: André B. Cotten, Regulatory Compliance Counsel
On November 16th, 2017, the CFPB, NCUA and several other representatives from federal agencies presented a webinar on lending topics ranging from the HMDA changes to Regulation B special purpose credit programs, compliance management for consumer loans and fair lending considerations. You can listen to the webinar here and download the presentation slides here. Here is a quick summary of the main topics discussed:
HMDA Changes and Fair Lending
A CFPB representative quickly went over the new HMDA rules that will be in effect for HMDA data collected in 2018 and reported in 2019. According to the speaker, the FFIEC released its HMDA Examiner Transaction Testing Guidelines that will be used by all federal regulators in assessing the accuracy of the HMDA data that financial institutions record and report. This guide has important information regarding testing procedures and tolerance calculations for errors in different sample sizes.
As far as examinations, the CFPB highlighted that it will be updating its HMDA Examination Procedures and Getting It Right Guide to make complying with the rules easier. And as we previously reported, the CFPB's approach in initial examinations will be consistent with the approach taken for other regulations, which means "good faith efforts" to comply will be taken into account.
Special Purpose Credit Programs
A NCUA representative reviewed Regulation B Special Purpose Credit Programs. A special purpose credit program is characterized as a credit incentive. For instance, a credit union offers a one-time rate reduction for designated loan products to one or more of its membership groups. In other words, this incentive program would not be offered to the credit union's entire field of membership.
NCUA discussed credit risks associated with offering these type of special purpose credit programs. According to the official interpretations to Regulation B, the credit union makes the determination if the program benefits an "economically disadvantaged class of persons". The requirements for special purpose credit programs are detailed in section 1002.8. Note, the credit union's program cannot be established to evade ECOA's nondiscrimination requirements. To comply with Regulation B, the credit union may request common characteristic information to determine eligibility. If financial need is one of the criteria for the special purpose credit program, the credit union may also request information need to determine financial need.
Compliance Management for Consumer Loans
A representative from the Federal Reserve Board presented on compliance management for consumer loans. Although most credit unions are not supervised by the Federal Reserve, a credit union would still find the presenters remarks helpful.
The discussion focused on fair lending risks and compliance management for the pricing of consumer loans. However, the same principles would apply to developing an effective fair lending risk management program for consumer loan underwriting, and for mortgage and indirect auto pricing and underwriting.
Many credit unions offer consumer loans that serve a critical need for members. The Federal Reserve identified common scenarios the fair lending risk for pricing arises, which include the following:
- The credit union grants the loan originators broad discretion to set the interest rate and fees
- The credit union does not use rate sheets or other pricing guidelines
- The credit union does not require the loan originators to clearly and consistently document pricing decisions, including exceptions
- The credit union does not monitor for potential pricing disparities on a prohibited basis.
The Federal Reserve Board's representative also identified the elements of an effective compliance management system: Board of Directors and Senior Management Oversight; Policies and Procedures; Risk Monitoring and Management Information Systems (MIS); Internal Controls.
The Federal Reserve expects the financial institution's board and senior management to ensure they understand the level of risk in the credit union's products, services, and business lines, including the fair lending risk in consumer loan pricing. Board and Senior Managers are also expected to administer compliance management program that is consistent with the size, complexity, and risk profile of the financial institution's products, services, and business lines.
In regards to policies and procedures, the Federal Reserve encourages financial institutions to develop policies and procedures (such as rate sheets, checklists, job aids, etc.) designed to ensure consistent outcomes and prevent discrimination on a prohibited basis. Financial institutions are also encouraged to provide training on the fair lending risk in consumer loan pricing, and the financial institution's policies should appropriately control that risk.
The Federal Reserve also provided some best practices. Financial institutions may want to use rate sheets or loan origination software that use clear pricing criteria, and, if applicable, clear pricing exception criteria. The financial institution may also want to require loan originators to clearly and consistently document pricing decisions, including exceptions.
Then, in regards to risk monitoring and management information systems, the financial institution may want to develop risk monitoring systems commensurate with the level of discretion permitted. The Federal Reserve also provided several fact scenarios and commentary to better explain various fair lending risk scenarios. The credit union may also want to provide the board of directors and senior management with the information needed to identify and evaluate fair lending risk for consumer loan pricing.
When developing and modifying internal controls, the Federal Reserve advises that financial institutions may want to develop periodic fair lending self-assessment processes. These processes can include compliance reviews and audits that are appropriate for the size, complexity, and risk profile of the credit union's products, services, and business lines.
Other Related Fair Lending Topics
There were numerous other presenters during the webinar. The FDIC representative provided additional guidance concerning Fair Lending Monitoring Programs. The FDIC's Compliance Manual defines "monitoring" as a proactive approach by an institution to identify procedural or training weaknesses in an effort to preclude regulatory violations. It also includes transactional testing. The FDIC discussed performing periodic analyses of data for fair lending risks. These reviews should be conducted on a portfolio-wide basis.
Moreover, a representative from HUD discussed recent common issues in consumer complaints at HUD. Some common complaints include the following: the treatment of disability income; the treatment of parental leave income; collateral policies; reasonable accommodations; and targeting tools for marketing through social media.
Lastly, an attorney from the Department of Justice discussed denial investigations and cases. The DOJ representative used a recent case to explain instances of mistreatment based on prohibited criteria. The complaint alleges that the bank required employees to deny loans from minority applicants more quickly than similarly-qualified white applicants. The bank also instructed its employees not to provide credit assistance to applicants whose applications were marginally qualified.
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Live Webcast on Tuesday, December 5 - Must a Credit Union Website be ADA Compliant? Protecting Your Credit Union from Potentially Frivolous Claims
Over the past few months, credit unions have been hit with scores of lawsuits (and perhaps hundreds of “attorney demand letters”) challenging the accessibility of credit union websites to visually-impaired individuals. Under the Americans with Disabilities Act of 1990, “public accommodations” are charged with being accessible to those with impairments. These cases and claims allege that credit union websites are places of “public accommodation;” that they are not fully-accessible to visually-impaired individuals; and that the visually-impaired claimant stands ready to resolve the matter “confidentially” for a cash settlement.
This 90-minute webcast will feature speakers with current experience in the legal and procedural issues involved, and will cover background information, current cases specific to credit unions, and what your credit union can do now to minimize its risk. Register here.
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