Regulatory Violations & Fair Lending Insights From the Latest Consumer Compliance Outlook

The latest Consumer Compliance Outlook has been released, highlighting the most frequently cited regulatory violations from 2023, published by the Federal Reserve. The newsletter offers insight into industry examination results and the underlying factors driving these issues.

This is a valuable opportunity for your financial institution to review the patterns identified in recent examinations and proactively address similar risks within your compliance programs. Lending issues are in the spotlight this cycle, with attention on both technical violations and fair lending concerns. Here’s a look at the two key topics.

1.     Equal Credit Opportunity Act (ECOA)

For ECOA, the regulators identified errors around adverse action notices. While the ECOA has been around for decades, this is an area where we see frequent errors and discrepancies. Additionally, although the most prescriptive parts of the ECOA requirements apply to consumer purpose credit and natural person applicants, we also see a high volume of errors in commercial purpose credit applications.

It was not clear from the Consumer Compliance Outlook analysis what portions of the issues identified were commercial or business purpose requests compared to consumer purpose applications – but that is a factor worth examining in a review of your institution’s practices.

The top issue was the failure to provide applicants with an adverse action notice within the regulatory timeframe, typically 30 days. In this case, if there’s no record supporting that the notice was provided, the regulator treats it as if it was never issued. For consumer credit, the notice must always be in writing – so retaining a copy of the notice that was sent is essential.

Another common misconception of this process is that commercial loans don’t require written notice. However, those entities with gross annual revenues below $1M and natural person applicants should all be receiving their notices within 30 days of application.

Failing to maintain an effective process for these notices increases the risk of errors and could result in a pattern or practice violation during an exam. Ensure the staff completing and sending these notices are familiar with the requirements, and be sure monitoring is in place to support compliance.

2.     Fair Lending

Fair lending was also a hot topic in this release, with several issues rising to the level of matters requiring immediate attention (MRIAs) and matters requiring attention (MRAs).  These issues are documented in a regulatory report and, by nature, are a high priority. They require immediate or near-term action and mandate a written response to your regulators. Having MRAs or MRIAs in your examination can negatively impact the overall rating, as they indicate significant weaknesses that, if not addressed, could lead to enforcement actions and monetary penalties.

What Were the Key Fair Lending Issues?

Failure to complete a fair lending risk assessment was the top MRA/MRIA identified. Why was this such a high priority for regulators? Regulators expect your program to align with your institution’s size, complexity, and risk profile – yet you cannot address what you cannot see.

The risk assessment should evaluate products, services, supervisory history, lending activity patterns, majority minority census tracts, and the structure and management of the organization, among other areas. The Examination Manual is a great place to start in evaluating whether you are covering key risk areas in your risk assessment.

Other issues identified included the failure to conduct fair lending training. Fair lending training isn’t just for loan officers – it’s for any employee involved in the lending lifecycle, from advertising and indirect lending to processing and collections. The training should also be role-specific and recurring.

Regulators expect clear standards for the training offered, including criteria for passing and ensuring the training is updated in response to regulatory changes. The board of directors should also receive fair lending training, as their oversight role is crucial in managing fair lending risks.

One other significant finding was a failure to raise nontaxable income in the underwriting process. This is a practice that devalues the buying power of those applicants who have nontaxable income, such as social security, meaning they are receiving disparate treatment compared to applicants with taxable (typically wage) income. Policies and procedures should clearly delineate the way this income will be handled in underwriting.

Lastly, risk monitoring and reporting weaknesses for exceptions resulted in MRIAs or MRAs.  The institution should have clear, written, and objective pricing and underwriting criteria, including a framework for what exceptions are available, how they are approved and reported.

Discretion without clear boundaries poses a significant fair lending risk, as it can lead to patterns of disparate treatment. Monitoring the exceptions that occur and ensuring those are reported through management to the board provides the necessary insight to address risks before they create significant problems at exam time.

Ready to Address Regulatory Risks?

Other topics in this issue included inaccuracies in finance charge disclosures on adjustable-rate mortgages (ARM) and broader accuracy of ARM disclosures, as well as a section on fintech partnerships and elder financial exploitation. While ECOA and fair lending were the main focus of this issue, all of these areas warrant review and action to ensure your program addresses the identified risks well before exam time.

If you’re unsure how any of these issues might impact your institution, now is the perfect time to reach out to your regulatory compliance expert at Wolf & Company to learn how we can assist you in addressing the unique challenges ahead.

Contact our team today.