# Presentation: 514706

## Fair Lending Risk Assessments

**Presented by:**
-  Ben Henke
-  Debra Pearlman
-  Fair Lending Examination Specialists

**Notes:**
Self-introduction.

## Presentation Overview

- Introduction
- Performing Risk Assessments
- Utilizing Risk Assessments

## Introduction

- Purpose of call: To discuss risk assessments.
- How to perform an assessment
- How to use an assessment
- Q&A opportunity
- _Risk assessment defined_: An effort to identify and measure the risk inherent in the bank’s lending processes and to determine what control and monitoring mechanisms are in place to protect against illegal discrimination.

## Introduction (Continued)

- Risk assessments identify risks and provide clues as to how to minimize/avoid risk.
- Three sources of fair lending risk:
- Overtly discriminatory policies and practices.
- Unnecessary application of a nondiscriminatory policy that has a discriminatory effect.
- Adverse use of discretion in the lending function relative to a prohibited bases.

## Performing Risk Assessments

**Regulatory agencies follow a risk-based fair lending exam process.**
**Goal is to establish scope of the exam, and considers:**
**Loan products**
**Markets**
**Decision centers**
**Time frame**
**Prohibited basis and control groups**
**Combination of these elements = “Focal Point” to be reviewed.**

## Performing Risk Assessments (Continued)

**Bank approach should be similar but more in-depth.**
**First step: Inventory all areas where risk is possible.**
**Will help develop a strong understanding of the bank’s credit processes.**

## Performing Risk Assessments (Continued)

**Review:****  **
**Written policies and procedures**
**Board and management reports**
**Training records**
**Consider:**
**Organization’s structure**
**Complexity of product offering & delivery channels**
**Demographics of the trade area/CRA assessment **

## Performing Risk Assessments (Continued)

**Look for:**
**Overtly discriminatory statements**
**In written documents and in officer/employee interviews**
**Differences in assistance provided to certain applicants**
**Subjective language.**

## Performing Risk Assessments (Continued)

**	****	****	****Discretion = Risk**
**Consider:**
**Frequency and significance**
**Controls in place to limit discretion**
**Monitoring efforts**
**Compensation agreements**

## Performing Risk Assessments (Continued)

**Review:**
** ****Board and management reports**
** ****Audit findings / Self-testing results**
** ****Board approval of policies**
**Consider:**
**Level of oversight**
**Filtering by senior management**
**Training effectiveness**

## Performing Risk Assessments (Continued)

**Review:**
** ****Organizational structure and complexity**
**Consider:**
**CO independence/authority**
**Discretion in various delivery channels**
**Complexity of product offering**
**Melded policies after acquisition or merger**

## Performing Risk Assessments (Continued)

**Review:**
** ****Demographics of the area**
** ****Product development process**
** ****Complaints resolution process**
**Consider:**
**Potential for redlining**
**Bias or predatory intentions**
**Evidence of complacency**

## Performing Risk Assessments (Continued)

**Mitigating controls**
**Limits on loan pricing discretion**
**Documentation requirements**

## Performing Risk Assessments (Continued)

**Review**
**Actions of subsidiaries, affiliates, and third parties**
**Consider:**
**Explicit prohibited basis identifiers**
**Credit scoring system that considers a prohibited basis**
**Overtly discriminatory statements**
**Disparities in denials or application processing times**
**Disparities in w/drawn or incomplete applications**
**Vague or subjective underwriting criteria**

## Performing Risk Assessments (Continued)

**Review**
**Actions of subsidiaries, affiliates, and third parties (cont.)**
**Consider:**
**A lack of guidance on exceptions**
**Compensation based on loan volume or pricing**
**Presence of broad discretion**
**Unreasonable risk-based pricing**
**Indications of steering or redlining**
**Customer complaints**
**Percentage of prohibited basis institution applicants vs. subsidiary applicants**

## Performing Risk Assessments (Continued)

**Review**
**Actions of subsidiaries, affiliates, and third parties (cont.)**
**Consider:**
**Lack of standards for referring applicants to subsidiaries or offering alternative products  **
**Significant differences in percentages between prime and sub-prime borrowers**
**Broad loan officer discretion**
**Location of branches for lender vs. sub-prime mortgage subsidiary  **
**Significant differences between lending in high- vs. low-minority areas**
**Demarcation of credit product markets that exclude areas with a high concentration of minority residents**

## Performing Risk Assessments (Continued)

**Review**
**Actions of subsidiaries, affiliates, and third parties (cont.)**
**Consider:**
**Policies relating to the processing of loans that vary between high- and low-minority areas **
**Employee statements that are discriminatory in nature**
**Complaints that indicate that the lender restricts access to credit in high-minority areas**
**Advertising practices**
**Proportion of prohibited basis applicant is significantly lower than the percentage of these groups in the total population of the market area**

## Performing Risk Assessments (Continued)

**Use of Surrogates:**
**First name**
**Surname**
**Residence address**

## Performing Risk Assessments (Continued)

_**Measurement – The Final Step**_
**Consider:**
**Volume of transactions**
**Severity of possible adverse impact**
**Level of compensating controls / monitoring**
**Determine:**
**Level of Risk Exposure**
**Need for additional compensating processes**
**Appropriate remedies for identified discrimination**

## Utilizing a Completed Assessment

| The assessment shows... | Possible action warranted |
| --- | --- |
| No monitoring of underwriting discretion. | Implement  secondary lender review and periodic audit. |
| No limitations on compensation incentives linked to higher loan pricing or overages. | Establish annual and per loan caps on lender compensation.  Implement self-testing or audit to detect predatory pricing. |
| No oversight of third-party loan servicing activity. | Implement periodic reviews to determine whether discretionary actions by the third party are consistent without regard to prohibited basis. |
| Identified instances of discrimination. | Change policies and training program, seek legal advice, compensate victims, take appropriate action against the personnel involved. |

## Fair Lending Risk Assessments

**Questions?**

## Regional Fair Lending Specialists

- Please direct any questions or concerns regarding issues discussed in this presentation to the Fair Lending Examination Specialist in your region.
- 		_New York Region_	_San Francisco Region_
- 		Joseph G. Chaloux	Debra B. Pearlman
- 		(781) 794-5572	(626) 359-7152
- 		_[JChaloux@fdic.gov](mailto:JChaloux@fdic.gov)_	_[DPearlman@fdic.gov](mailto:DPearlman@fdic.gov)_
- 		_Atlanta Region_		_Kansas City Region_
- 		Jeffery L. Tate		Ben H. Henke
- 		(678) 916-2313	(816) 407-9546
- 		_[JTate@fdic.gov](mailto:JTate@fdic.gov)_		_[BHenke@fdic.gov](mailto:BHenke@fdic.gov)_
- 		_Dallas Region_		_Chicago Region_
- 		Everett L. Fields	Daniel R. Peters
- 		(972) 761-8003	(312) 382-6936
- 		_[EFields@fdic.gov](mailto:EFields@fdic.gov)_	_[DaPeters@fdic.gov](mailto:DaPeters@fdic.gov)_