ABA Bank Compliance - May/June 2013

We’Ve certainly Seen a lot oF changeS in the regulatory world over the last few years, particularly when it comes to new rules and enforcement priorities. The Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd Frank) changed the game
on many levels. With Dodd-Frank, regulation shifted to focus on how
banks’ decisions and actions affect consumers. Most obviously, we see
this in unfair, deceptive, or abusive acts or practices (UDAAP), but it
also affects the focus of fair lending.
Legislators and regulators have clearly raised expectations for fair lending
programs and efforts. A new agency, the Consumer Financial Protection
Bureau (CFPB), now oversees some fair lending laws and regulations. There
are increased areas of focus and stricter enforcement with much larger
penalties. The result is higher inherent fair lending risk for all banks. So,
what do we do now? How can banks be prepared for these new expecta-
tions and mitigate these risks? The first step is awareness.

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Expanded fair lending exams are now the norm. As recently as five or 10 years ago, fair lending was mostly about consumer mortgage lending; Home Mortgage Disclosure Act (HMDA) data was the centerpiece. That is where the demographic data is available, after all. Bankers ran some disparity and odds ratios, looked at some matched pairs, and dug into some files. That was a lot of work, but there’s more to look at.

Consider more loan types. It makes logical sense: discrimination against a protected class is illegal in any extension of credit that a bank makes, so why has the focus traditionally been on consumer mortgage loans? The answer has been that the demographic data is available to analyze those loans, thanks to the Equal Credit Opportunity Act (ECOA) and HMDA. However, that’s certainly not the only place discrimination occurs.

In recent years, regulators focused on other
loan types, including credit cards, student loans,
indirect lending (auto loans, in particular),
and commercial loans (mostly focusing on
small businesses), among others. In some cases,
overdraft decisions are also treated as credit.
In short, the same issues seen in mortgages,
(redlining, pricing, or servicing disparities)
can happen anywhere.

Use of proxy data. In situations where the lender does not know the race, ethnicity, gender, or other demographic information about the applicants or borrowers, proxies of that data can be used. Proxies are assumptions made about demographic characteristics, typically based on information that is known, such as the customer’s name and address.