Equal Credit Opportunity: Critical Considerations for Fair Access and Fair Treatment in Consumer Lending

The pace of regulatory and operational guidance relating to credit requests in the wake of the COVID-19 pandemic and associated economic hardships has been relentless. While much of the guidance released has been specifically applicable to loans under the Small Business Association’s (“SBA”) Payment Protection Program (“PPP”), the frenetic pace of credit requests serves as a reminder to keep fairness central to all types of lending.

The Office of the Comptroller of the Currency issued OCC Bulletin 2020-45 on April 27, 2020 to clarify expectations regarding documentation for PPP loans. One of the points of emphasis of this Bulletin is that maintaining and monitoring information collected during the processing of loan applications remains “a prudent banking practice consistent with the principles of safety and soundness and fair access and fair treatment of borrowers, and other applicable legal requirements.”[1]

Further, the guiding principle of fairness can be found in a recent blog posting by the Consumer Financial Protection Bureau (“CFPB”). In this, the CFPB reminds readers that “as small business owners and lenders work together to access the CARES Act options or other loan programs, anti-discrimination laws, such as the federal Equal Credit Opportunity Act, protect business owners from discrimination because of race, color, national origin, sex, and other protected characteristics.”[2]

This guidance makes it clear that regulatory expectations relating to fairness, in general, have not been loosened. In fact, they may be more important than ever. As the economy contracted by 4.8 percent in the first quarter of 2020,[3] institutions of all sizes are likely already experiencing growth in lending activities that may be accompanied by increased levels of risk; and managing those risks comes with a set of unique challenges. The expectation of fairness should, as always, extend to all types of credit and throughout the product lifecycle.

Credit requests and lending activity are increasing. However, these requests may generally be for types of credit or activities stemming from negative economic conditions impacting consumers and businesses. For example, institutions may experience an uptick in requests relating to credit card or personal line of credit accounts. With unemployment claims exceeding 30 million nationwide[4] and increasing, requests for payment deferrals, interest rate relief, and modifications of terms such as an increase in a credit line amount are also increasing.

Processing Risks

With a remote workforce and an increasing demand for credit from customers impacted by the pandemic, institutions are likely to experience new challenges in processing requests. One critical question to consider is this: Can your operational processes be maintained in this remote, work-from-home, rapidly changing environment resulting from the pandemic? Hardship programs, which are likely at a higher demand at this time, may have changed due to the economic impact of the pandemic. If employees cannot easily access the company intranet for current policy or guidelines, there may be an increased risk of a remote employee utilizing older qualification criteria, which increases the risk for disparate treatment.

It is critical that institutions make available, by any reasonable, secure means necessary, the appropriate policies, procedures and other guidance needed for these teams to do their jobs in a fair and consistent manner. This necessitates that institutions must test and verify access to SharePoint sites, or other file sharing protocols, or provide information via secure emails. Quality control efforts likely need to be increased during this time as well to ensure that proper processes are being followed.

Other workflow processes that help to maintain fairness may be impacted, such as a second review of denials, before adverse action notices are sent to applicants. If your institution has traditionally focused second review efforts on mortgage lending, consider expanding coverage to other types of consumer lending such as credit card or personal lines of credit.

“Stay at home orders” are creating other unique processing challenges. Customers may not have the capability at home to scan and upload requested documentation to a lender. And although many individuals have widely adopted smartphone cameras and texting to distribute images personally, institution policies may still require document scanning that could present challenges. Consequently, some clients may not easily be able to upload items such as income verification. Additionally, loan processing teams may struggle to obtain employment verification if there are third-party provider or employer limitations. Institutions may decide to waive certain requirements, and it will be important to ensure that any waivers are being applied consistently and fairly.

While many requests may be for payment relief or line increases, institutions also face challenges in managing their internal credit risk during this time. The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) protects consumers from unexpected interest rate increases on existing balances. Given the inability to re-price based on what may be perceived as an increased risk of default, institutions may begin to consider managing credit risk in other ways. Specifically, decisions to reduce line amounts or restrict line usage may come under heavy scrutiny. Decisions to restrict a consumer’s access to credit should be applied in a consistent and fair manner, and there should be documentation supporting those decisions.

The importance of process and policy documentation cannot be overstated. Institutions may consider taking a proactive approach to review process documents, such as those relating to the standards used to determine if a line reduction or restriction is warranted to ensure the criteria are non-discriminatory and can be applied in a consistent, fair manner. Again, quality control efforts should be robust to validate that reductions and restrictions are processed in line with policy, and that consumers are appropriately notified.

Analysis Considerations

Monitoring and testing are components of any healthy compliance management system, and they are critical to managing the fair lending risk associated with the ongoing influx of consumer credit requests. Continual monitoring of complaint information can create an early warning system of sorts by allowing institutions to note “hot spots,” i.e. areas where complaint volume seems to be higher based on a certain product, geography, or individual lender. Any complaints alleging an issue of discrimination or fairness should be escalated to appropriate parties within the Compliance Department, and that data should be leveraged for further analysis.

To effectively monitor for fair lending risk, institutions will need robust data analytics to identify any potential disparate treatment or disparate impact concerns. This type of analysis will require certain data points to assist in determining the consistency of decisions made throughout the consumer lending process, and some of those data points may be different from those that compliance departments have traditionally leveraged in fair lending analysis. The data points needed should be determined by the policies and guidelines governing the lending process during this time.

For example, with differences by state—and sometimes county—for stay-at-home orders and restrictions, large credit card issuers may have different hardship programs or modification options available for different regions or stages of the pandemic. If those who are still fully under a stay-at-home order have different options available than those who are in a later phase of a gradual re-opening, institutions will need to understand the data available to correctly group borrowers based on similar situations or conditions.

For in-depth testing for disparate impact or disparate treatment, compliance teams generally have two tried and true methods: statistical regression and comparative file analysis. The latter is sometimes referred to as benchmark overlap or matched pair testing. Statistical regression, which tests for potential disparate impact, can assist institutions in determining whether the factors listed in hardship programs are driving decisions and can identify potential outliers—those that seemed to have had a high probability of a certain action but received a different action. A borrower with a high probability for approval of a line increase based on credit factors but who was denied the increase would become a potential outlier.

Comparative file analysis, which tests for potential disparate treatment, will allow institutions to match prohibited basis group, or minority, target borrowers with control group, non-minority borrower comparator files. This matching should be used to locate target and comparator files that seem to be similarly qualified yet received a different action, such as a different modification decision or a different price. This allows for a side-by-side view of target and comparator files that can be leveraged to identify differences in treatment. Files identified as potential concerns through regression or comparative file analysis should be further reviewed, and any issues identified must be subject to appropriate escalation and remediation processes based on the institution’s internal policies.

While data analytics such as regression and comparative file analysis are critical, institutions should also consider mapping as an analysis tool. If a picture is worth a thousand words, a map may serve as a relatively quick way of helping to visualize potential issues. For example, maps of credit card accounts with line reductions or restrictions may show that borrowers in minority or lower-income neighborhoods are being disproportionately impacted; or that those borrowers are a complaint hot spot.

Conclusion

In the current, challenging environment, the expectation of fairness has not changed. In an effort to assist customers, lenders are trying to make fast-paced decisions in a rapidly changing work environment and economic situation. Those decisions will, as always, be reviewed by examiners at a later date and with the benefit of hindsight. If regulatory action results in sensational headlines, the reputational damage could be immeasurable. Proactive compliance management and testing is critical to minimize the risk in the next exam cycle, and beyond. The pandemic has already caused significant adverse economic consequences. And the pandemic itself as well as related stay-at-home orders have also disrupted business processes. Together, these economic consequences and disrupted business processes create a heightened focus on the fairness by institutions. OCC Bulletin 2020-45 reminds regulated institutions of the criticality of their fairness obligations.

About the Author

Britt Faircloth is the fair and responsible banking consulting manager for Wolters Kluwer U.S. Advisory Services, where she focuses on fair and responsible banking, CRA, HMDA, fair lending and redlining data analytics for institutions of all sizes, including CRA and fair lending market analysis, fair lending risk reviews, and integrated redlining reviews. In this role, Faircloth brings over 20 years of relevant banking and regulatory compliance experience to assist institutions in performing fair lending risk assessments, UDAAP risk assessments, CRA self-assessments, compliance management system (CMS) reviews, complaint management program reviews, third-party vendor program reviews, and other types of quantitative and qualitative data analytics. She can be reached at [email protected].

DISCLAIMER: The information and views set forth in this Wolters Kluwer Financial Services’ communication are general in nature and are not intended as legal or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by Wolters Kluwer Financial Services that may not take into account potentially important considerations to specific businesses. Therefore, the views and information presented in this Wolters Kluwer Financial Services’ communication may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

[1] https://www.occ.gov/news-issuances/bulletins/2020/bulletin-2020-45.html

[2] https://www.consumerfinance.gov/about-us/blog/fair-equitable-access-credit-minority-women-owned-businesses/

[3] https://www.commerce.gov/news/press-releases/2020/04/statement-us-secretary-commerce-wilbur-ross-q1-2020-gdp-advance

[4] https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20200774.pdf