Fair Lending and Responsible Banking Solutions Brochure
Consumer Financial Services
May 05, 2023DownloadsDownload Brochure
Inequity in the lending and financial markets continue to be a primary focus of regulators. In addition, communities will soon have more visibility of an institution’s small business lending practices. Whether it’s mortgages, small business, automotive or other consumer lending products, entities need to manage their fair lending risks related to pricing, underwriting, redlining, marketing, appraisal bias, among others.
FTI Consulting’s Consumer Financial Services (“CFS”) is composed of professionals with in-depth industry, regulatory and consulting experience providing practical fair lending compliance insights and support. FTI Consulting experts have significant experience assisting financial institutions of all sizes and complexity levels, often in response to critical fast moving regulatory matters.
Product Based Risks
Small Business Lending
Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (“ECOA”)1 requiring significant operational changes in the collection, monitoring and reporting of credit and applicant demographic information of small business lending. Small business lenders should not only begin implementing the requirements but should also start reviewing, as early as practical, their newly acquired data to assess fair lending risks in preparation for regulatory examinations.
FTI Consulting has the expertise to provide a full solution to assist small business lenders with assessing their operational risks, implementing the requirements of the 1071 Rule and identifying any fair lending risks based on the newly gathered data.
Regulators continue to focus on fair lending risk in the mortgage marketplace. Mortgage lenders incur risk throughout the mortgage product life cycle, from gathering the required data under the Home Mortgage Disclosures Act2 to assessing fair lending risk in origination and servicing activities. Such risks include pricing, underwriting, redlining, digital marketing, appraisal bias and loss mitigation activities. FTI Consulting experts apply their regulatory and business experience to prepare clients for their next regulatory examination or assist with responses to examination findings and enforcement actions.
Consumer credit products (e.g., automotive, unsecured, or credit cards) each have unique lending risks which require diligent mitigation controls. Further, unlike mortgage or small business lending, lenders offering consumer products are unable to collect applicant demographic information for further fair lending analysis. FTI Consulting understands these complexities in assessing fair lending risk. Our CFS professionals and dedicated Data Analytics teams have extensive experience developing strategic business solutions requiring in-depth analysis of large sets of financial, operational and transactional data. Such analysis includes applying Bayesian Improved Surname Geocoding (“BISG”) which employs the applicant’s name and address to proxy for the applicant’s ethnicity/race and gender.
Fair Lending Regulatory Solutions
Pricing and Underwriting
FTI Consulting uses a proven methodology when performing pricing and underwriting reviews to determine possible fair lending risks.
Artificial Intelligence and Machine Learning (“AI/ML”) Modeling
Models that use AI/ML are replacing traditional credit and marketing decisions. As these technologies advance, lenders must be conscious of how their models perform. Regulators have expressed concerns around these models, or “Black Boxes”, and have stated that lenders must have adequate controls to reduce fair lending risks. FTI Consulting’s CFS and Data and Analytics teams understand the complexity of these models and have the expertise to assist lenders in establishing model governance which includes fair lending analysis of the model.
FTI Consulting can assist in analyzing application generation against peer institutions using publicly available data (e.g., HMDA data) and/or FTI Consulting’s industry benchmarks. Additionally, FTI Consulting will review marketing practices (digital and non-digital), branch distribution and other activities (e.g., internal communications) to help identify potential fair lending risks.
1071 Small Business Lending Rule (“1071 Rule”)
The new 1071 Rule has created heightened regulatory focus on inequity in small business lending and small business lenders should expect scrutiny regarding their lending operations and access to credit for small and minority-owned businesses.
FTI Consulting has the expertise to help lenders implement the rule requirements as well as identify fair lending risks using the newly collected data points. The new rule certainly poses operational challenges for small business lenders. In addition to collecting information from small business applicants, lenders must have a keen eye in evaluating their policies, procedures and practices throughout the lifecycle of the application to ensure compliance with the 1071 Rule.
FTI Consulting experts can assist with implementation, testing and evaluation of compliance with the new data collection and reporting requirements, as well as assessment in accordance with the institution’s fair lending program.
Financial Institutions should determine that their Compliance Management System (“CMS”) is updated to identify new regulatory requirements and mitigate the risk involved. This includes updating P&P, training, monitoring and audit schedules.
Implement and Test
After establishing the necessary controls, financial institutions need to implement the rule requirements and immediately test during and after implementation to ensure all required data is collected and can be transmitted accurately.
Fair Lending Analysis
While the initial focus from regulators will be on rule implementation, lenders should not wait to start assessing for fair lending risks using the new data. Such risks include pricing, underwriting and redlining.
Should lenders identify disparities, they will need to quickly review for root cause, develop an action plan and take necessary actions to remediate practices and provide redress for applicants as appropriate. Policies and procedures may require adjustment to mitigate small business fair lending risk going forward.
Appraisal Bias examinations and enforcement are novel to the mortgage industry. Regulators are expanding their reviews to include possible discrimination in appraisals. FTI Consulting has a readily available systemic solution to support clients in identifying potential fair lending risks. FTI Consulting’s solution includes:
- Performs a keyword search and builds adaptive learning to identify terms not previously considered
Reconsideration of Value
- Performs a review of the entity’s reconsideration of value process
- Uses statistical significance tests to compare valuation results against initial sales price or estimated value
- Identifies if any correlation exists between valuation differences and a prohibited basis