Data Driven Regulation: What It Means for Fair Lending Compliance

Data Driven Fair Lending Compliance

The Consumer Finance Protection Bureau prides itself on being a data driven organization when it comes to fair lending compliance.

What does that mean for a compliance officer? More importantly, what does it mean for your next fair lending compliance exam? Does it mean more number crunching? In part, yes, but it also means much more.

Five Elements of Fair Lending Compliance Data

From the CFPB’s perspective there are five elements in their data driven approach, or stated another way, there are five different types of data they consider when they are preparing their lists of banks to target for fair lending exams: complaints/tips, exam and supervisory history, compliance management systems, publicly available data and market information.

From my perspective, even though the CFPB may be more vocal about their data driven approach, the approaches of the other regulatory agencies (the Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) really amount to the same thing. That is, all the agencies look at the same data elements when performing their fair lending exams. What follows below is a brief look at each of these elements since they are touchstones for compliance officers preparing for their next fair lending compliance exam.

  • Complaints/tips: Complaints from your customers or tips from (typically) former employees are a source of where the examiners may search for fair lending problems. But suppose there are no complaints or tips at your bank. Does that mean there is nothing for you to learn from this type of data? I think not. The CFPB and other regulatory complaint databases may provide insights into areas where other institutions are receiving complaints and hence may be a fertile area for examiners to search at your bank.
  • Supervisory and exam history: One examiner told me the first places he goes when preparing for a bank examination are the issues highlighted in previous exams to discern whether or not they have been fixed. No band aids please.
  • Compliance management systems: Every bank should have a compliance management system of varying degrees of sophistication depending on the complexity of the bank’s business model. Some of the elements every compliance management system should have include:
    • An up-to-date fair lending policy statement
    • Board/Management involvement/oversight of the fair lending program
    • Regular fair lending training
    • Independent auditing of the fair lending program
    • On-going monitoring of fair lending programs
    • A complaint management program
  • Publicly available data: Of course what immediately comes to mind is the bank’s HMDA data if it is an HMDA reporter, but there are other publicly available data such as CRA exam reports and those complaints that reside in the various regulator complaint databases.
  • Market information: The CFPB has a market intelligence function that studies various product markets (such as credit cards, payday loans, etc.) to determine which of these markets have the most potential of doing harm to consumers. Other regulators may perform the same function on a less formal basis. Certainly they all read/see the reports in the public press.

In short, when a regulator talks about being data driven, in part he/she means the numbers associated with fair lending, but that is only part of the picture. There are four other elements to the data driven story. A compliance officer who only looks at the numbers is being myopic and may be unprepared for their next fair lending compliance exam.

Posted in Current Events.

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