8 Common Fair Lending Compliance Myths Debunked

Michael Berman is Founder & CEO of Ncontracts, Brentwood, Tenn. Ncontracts provides integrated risk management and lending compliance software to a rapidly expanding customer base of over 4,000 financial institutions, fintechs and mortgage companies in the United States. The company’s combination of software and services enables financial institutions to achieve their risk management and compliance goals with an integrated, user-friendly cloud-based solution suite that encompasses vendor risk, organizational risk, audit risk and lending compliance management. For more information visit www.ncontracts.com.

Michael Berman

President John F. Kennedy famously said in a 1962 commencement address at Yale University, “The great enemy of truth is very often not the lie – deliberate, contrived, and dishonest – but the myth – persistent, persuasive, and unrealistic. We enjoy the comfort of opinion without the discomfort of thought. Mythology distracts us everywhere.”

These powerful words illustrate exactly why myths are so dangerous and encourage us to seek truth and clarity. In compliance, believing in myths may lead financial institutions and lenders to inaccurately prioritize focal points, or underestimate their risk exposure.

As Fair Lending compliance attracts greater attention, debunking popular myths is especially critical. Last month, Rep. Maxine Waters wrote a letter to bank regulatory agencies, urging them to “escalate” their scrutiny of Wells Fargo for allegations of consumer abuses. Waters pointed to a Bloomberg article from earlier in the year, citing that fewer than half of Wells’ black applicants were approved for mortgage loans.

Additionally, the GAO issued its report last month, detailing a decline in Fair Lending examinations and concluding there are opportunities to enhance the OCC’s oversight of financial institutions’ lending practices.

As Fair Lending risk management becomes a greater priority, it can be complicated by misinformation. Based on conversations with industry experts and financial institutions, there are eight common myths to be aware of:

  1. “Our written policies and procedures have us covered.”

Written policies are a great start, but compliance is not a static activity. True risk management requires that you regularly monitor and evaluate written policies to ensure that they are effective in practice.

  1. “Fair Lending compliance is about underwriting.”

ECOA states that creditors may not discriminate on a prohibited basis during any aspect of the credit transaction, from start to finish. Regulators consider marketing practices, redlining risk, and service areas, in addition to underwriting, when evaluating compliance.

  1. “Our staff fully understands compliance.”

Staff members may have a working knowledge of fair lending and do not intend to discriminate. However, the complexity of these regulations demands regular training, management reinforcement, and lending pattern monitoring to fully manage compliance risk.

  1. “We don’t have diversity in our market area.”

The definition of diversity may be broader than you think. The Fair Housing Act and ECOA prohibit discrimination based on race or color, religion, national origin, sex, marital status, applicant’s receipt of income, familiar status, and handicap.

  1. “Fair Lending is primarily about HMDA.”

Most fair lending analysis starts with HMDA, but it doesn’t end there. The Interagency Fair Lending Exam procedures clearly outline seven steps to review; step six includes Consumer Lending and step seven reviews Commercial Lending. ECOA is about all types of credit transactions, not just mortgages and HMDA.

  1. “Our consultant manages compliance.”

Good consultants are worth their weight in gold, but effective fair lending compliance actively engages senior management, compliance departments, and the front line.

  1. “The compliance department owns compliance.”

Compliance is not just a department; it is a mindset of day-to-day execution. This is especially true for fair lending. While senior management and the compliance department play a key leadership role, the entire organization must assume responsibility.

  1. “Fair Lending doesn’t apply to small lenders.”

ECOA, FHA, and other pertinent acts do not offer equal treatment exceptions. An assessment will consider loan volumes, market diversity, and product complexity, but fair lending compliance applies to all lenders.

These persistent statements tend to be partial truths, and all the more dangerous for their illusions of reality. If you’ve heard, thought, or said any of these, your financial institution is likely operating with serious compliance vulnerabilities.

Regulators, including the CFPB, OCC, NCUA, and FDIC, have put a bright spotlight on Fair Lending. For financial institutions, the oath to Fair Lending risk management is often cluttered by misinformation. Properly addressing risk starts with a clear understanding of the realities of Fair Lending laws and regulations.

Compliance is already complicated enough. Don’t let these myths further complicate your Fair Lending risk management.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to NewsLink Editor Mike Sorohan at msorohan@mba.org or NewsLink Editorial Manager Michael Tucker at mtucker@mba.org.)