Independent Banker - July 2019 - 19

Next: Other competitors to keep on your radar
sumer ethnicity and race data, do what your examiners do.
First, get familiar with your community bank's fair lending
program and get a good understanding of your bank's
size, complexity, products, business model, and legal or
operational limitations.
Next, review your community bank's fair lending history
by looking through the results of past examinations, monitoring,
audits and corrective measures.
Then, establish a baseline for your upcoming work by
reviewing the fair lending risk assessment and updating
it, if necessary. What policies, procedures or products have
changed or have been implemented since your bank's fair
lending history was last reviewed? What training has been
conducted, to whom was it presented and what records
were kept?
Get the picture? That's the point.
Evaluation criteria
What steps do examiners take to evaluate a community
bank's fair lending practices? It may be one of the world's
worst-kept secrets. Publicly available resources are peppered
with valuable information about the scope and process
of fair lending evaluations. Some might immediately come
to mind, such as the Interagency Fair Lending Examination
Procedures and Equal Credit Opportunity Act (ECOA), or
reviews of Home Mortgage Disclosure Act (HMDA) data for
accuracy, omissions and lending patterns.
Others might come from outside the box. For instance,
the FDIC offers a course to train examiners on technical
aspects of the Fair Housing Act (FHA) and ECOA, and how
to conduct a fair lending examination. Key objectives for the
training include:
Q measuring risk from underwriting, steering, pricing,
redlining and marketing
Q conducting comparative file analysis
Q evaluating management's responses to apparent differences
in treatment.
Although the instruction is not available to the public, the
course description may point community bankers to areas
that need attention.
Similarly, in its Consumer Compliance Supervision
Bulletin released last year, the Federal Reserve Board published
a robust discussion of its supervisory observations
regarding fair lending in the areas of redlining, pricing and
underwriting. The bulletin covers key risk factors of fair
lending, such as the Community Reinvestment Act (CRA)
assessment area, lending record, branching strategy, complaint
management, and marketing and outreach strategies.
It focuses on enhancing bankers' understanding of common
fact patterns and emerging risks so institutions can better
manage risk, and the information can be of value regardless
of a community bank's primary federal regulator.
Culture counts
Beyond technical violations, regulators look for an overall
compliance culture that supports fair lending practices,
including board of directors' oversight, proficiency and consistency
in individual lines of business, and the breadth and
depth of the compliance management function. Fair lending
findings and nontechnical information gathered during an
exam, such as the knowledge and confidence of community
bank staff, create a picture of the compliance management
system (CMS), the extent to which the culture supports
compliance and the ability of management to effectuate
ongoing compliance.
Each federal regulator has published its expectations for
banks in implementing a thoughtful, current and effective
CMS, including self-management of fair lending training,
monitoring, testing and corrections. ECOA's Regulation B
specifies that results of voluntary self-testing are privileged
if the creditor has taken appropriate corrective action. To
that end, self-testing and self-correction for fair lending
requirements can benefit community banks.
Try the examiner approach. Know where you are and
where you need to go, then use the tools designed to evaluate
fair lending compliance. You could up your community
bank's fair lending compliance game and contribute to your
regulator's confidence in the program.
Mary Thorson Wright, a former Federal Reserve examiner, is a
financial writer in Virginia.
independentbanker.org Q 19
Refresher: The 5 Cs of credit
On top of fair lending compliance, all loan officers
should look at the five Cs when assessing a
borrower's creditworthiness. They are:
Q Character: What is a borrower's financial
standing?
Q Capacity: Does the borrower have the cash flow
to pay back the loan?
Q Capital: Is the borrower investing their
own money?
Q Collateral: Does the borrower have secondary
sources of repayment to reduce risk?
Q Conditions: How will the borrower fare in
their market?
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Independent Banker - July 2019

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