Knowledge and Insights

Focus on Fair Lending Compliance

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Fair lending compliance remains in high focus with federal and state regulators. The Department of Justice recently created a new fair lending enforcement unit staffed with economists, attorneys and an executive-level counsel for fair lending in the assistant attorney general’s office. Several regulations are used to enforce fair lending, including the Equal Credit Opportunity, Fair Housing, Community Reinvestment, Fair Credit Reporting and Home Mortgage Disclosure Acts. The primary goal of fair lending is to prevent discrimination and promote the availability of credit to all credit-worthy applicants, without regard to race, age, sex, religion and any other prohibited bases.

Federal and state regulators have the authority to assess civil money penalties (CMPs) for fair lending violations. Each agency has the authority to assess CMPs of up to $5,000 per day for any violation of law, rule or regulation. Penalties of up to $25,000 per day also are permitted if the violations represent a pattern of misconduct, cause more than minimal loss to the financial institution, or result in gain or benefit to the party involved. In addition, federal banking agencies may also require a financial institution to take affirmative action to correct or remedy any conditions resulting from a pattern or practice.

Therefore, it is imperative that a bank perform a fair lending risk assessment to identify and measure the inherent risk in their lending process and to determine what control and monitoring mechanisms are in place to protect against illegal discrimination. Areas to review during your periodic fair lending risk assessment are as follows:

  • Written policies and procedures
  • Products and services
  • Loan policy-exception reports
  • Compensation agreements
  • Customer complains
  • Board management reports
  • Declined loans
  • CRA assessment area
  • Training program
  • Advertising practices

The fair lending risk assessment needs to evaluate high-risk indicators and the bank’s process to identify potential outliers that require further review. These high-risk indicators include:

  • Overt discrimination
  • Potential disparate treatment in underwriting
  • Potential disparate treatment in pricing
  • Potential disparate treatment by steering
  • Potential discriminatory redlining
  • Potential discriminatory marketing

Corrective action is to be taken in the event your bank discovers practices that may be discriminatory. The root cause of these discriminatory practices should be identified to ensure that processes are updated to mitigate discriminatory practices in the future. Additionally, the bank should determine if the applicant is to be contacted to extend credit in the event that applicant was denied improperly, compensate them for any damages (both out-of-pocket and compensatory), and notify them of their legal rights.

Contact Salvatore Zerilli of Mercadien’s Financial Institution Services Group at or 609-689-9700 to learn how our compliance advisory and audit services can help your bank through this process.