In the latest edition of its Consumer Compliance Outlook, the Federal Reserve (Fed) identified the four most significant fair lending violations that it found in examining state member banks in 2022. These are violations that were typically identified in examinations as matters requiring attention or as matters requiring immediate attention.
Fair Lending Risk Assessment. The Fed cited the failure to conduct a rigorous and separate fair lending risk assessment as the most significant violation observed by examiners.
“An institution’s overall fair lending risk management program should be commensurate with the size, complexity, and fair lending risk profile of its lending,” the Fed stated. “Supervisors expect institutions with heightened fair lending risk to conduct a fair lending risk assessment to ensure the risk is being appropriately measured and mitigated.”
Instead, some financial institutions with heightened fair lending risks relied on their compliance risk assessments. A compliance risk assessment is considered inadequate because it is more general and less nuanced than a fair lending risk evaluation and therefore, it may fail to identify problems, the Fed warned.
Fair Lending Training. The Fed cited the failure to conduct fair lending training as the second most significant violation observed by examiners.
“Effective, complete, and recurring training is an essential part of a fair lending compliance management program,” the Fed said.
Simply relying on compliance departments is considered problematic, since those departments may become complacent and may overlook the benefits of targeted training.
Grossing Up Non Taxable Income. The Fed cited the failure to gross up nontaxable income as the third most significant violation observed by examiners.
“If a lender’s system analyzes gross income and fails to gross up the income when the applicant’s income is nontaxable, the practice raises fair lending risk,” the Fed stated. “It may result in discounting an applicant’s income on a prohibited basis, and could also result in discriminatory loan denials due to insufficient income.”
The Fed emphasized that banks need to have policies and procedures in place that require underwriters to gross up nontaxable income when underwriting is based on gross income.”
Exception Monitoring. Finally, the Fed cited the failure to monitor loan officer discretion as the fourth most significant violation observed by examiners..
One solution is to eliminate discretion by stating in the loan policy that exceptions are not permitted.
“Alternatively, banks that allow loan officers to retain discretion to make exceptions to policy can limit that risk by tracking and maintaining oversight over how loan officers use those exceptions,” the Fed said.
Recommendations. The Fed concluded by emphasizing the importance of attending to these matters.
“While banks are responsible for all aspects of their fair lending compliance management program, compliance officers may benefit from reviewing these more frequently issued matters and comparing them to their current practices,” the Fed said.. “Banks should raise specific fair lending issues and questions with their primary regulator.”
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