As with all regulatory bodies, the CFPB has to pick what companies are a high risk and should be examined first. This is referred to as “Risk Based Prioritization”, and according to the CFPB they look at Five categories to determine who moves to the top of the priority list. The information for this article was gathered from a presentation given by Tim Lambert who is the Senior Counsel, Fair Lending & Equal Opportunity, CFPB. The categories for risk-based prioritization that he mentioned are:
-Consumer or Industry complaints
-Supervisory & Enforcement History
-Quality of a provider’s Compliance Management System
-Data Analysis
-Market Insights
Specific to the Data Analysis and mortgage lending, HMDA data is used to evaluate a lender’s performance in relationship to their peers. If the lender is underperforming in under-served areas of their market, as compared to their peers, then this may be a trigger to dig deeper through an examination.
From this information gathering the CFPB then prioritizes who should be examined. Specifically, for Fair Lending Prioritization they consider the following:
-Fair Lending risk related to a particular market
-The size of the product market
-The entity’s market share
-Fair Lending risks inherent to the entity’s operations and offering of financial consumer products within that market.
If the risk based prioritization process reveals lending risks that warrant an in-depth review, the bureau conducts an ECOA targeted review of the institution. You can probably imagine that a consumer’s mortgage is a pretty high target area, since it is such a big part of a consumer’s financial profile.
During the targeted review, the bureau will typically use statistical analysis, and loan file reviews. “The CFPB uses data analysis and testing to detect and assess disparities in an
institution’s treatment of applicants and borrowers by analyzing whether similarly-situated applicants and borrowers were treated differently on a prohibited basis.”
Additionally, the “examination teams may examine one or more areas to evaluate ECOA compliance including underwriting, pricing, redlining, or steering.”
Lenders who are aware of what is expected and pays close attention to the details of the settlements that have occurred in the past; should be well-informed as to what they need to do.
Here are the issues that the CFPB has identified in previous mortgage reviews. These “concerns” should go to the top of your priority list as “things to do”.
-Weak or nonexistent fair lending compliance management systems (CMS)
-Underwriting and pricing policies that consider prohibited bases in a manner that violates ECOA/Regulation B or presents a risk of a fair lending violation.
-Inaccurate HMDA data (as an industry we are really bad at data integrity according to the regulators).
-Noncompliance with ECOA/Regulation B’s adverse action notification requirements.
In future articles, I will take deep dives into all of these areas and offer some proactive ideas that will help you prepare for an ECOA review. The first step in your fair lending process is understanding the process of the examiner, knowing what they expect of your company and then taking the findings of deficiencies from other lenders, as a road map of “things to do” to best achieve your company’s success in an exam.
