It’s time for banks to reevaluate fair lending practices
Given the Biden administration’s heightened focus on consumer advocacy and protection, now is a good time for financial institutions to reevaluate their adherence to fair and unbiased practices, and to renew their commitment to the customer experience.
The effects of a tumultuous 2020 are plain to see in the consumer lending space. A surge in loan-modification requests and strong demand for new originations under various government relief programs revealed shortcomings in financial institutions’ day-to-day lending practices. These issues go beyond compliance with specific laws and regulations – they also encompass whether banks are doing the right things for all their customers.
What steps can a financial institution take to address and improve customer experience and ensure it is promoting fair and unbiased outcomes? For starters, financial institution leaders should communicate a clear “tone at the top” message and mindset supporting their commitment to a positive customer experience.
Additionally, depending on the institution, compliance functions should perform a year-end analysis of customer service practices and adherence to fair and unbiased policies. The analysis may include all or some of the following practices:
Self-assessment: A self-assessment, rooted in customer experience and aimed at helping the institution detect illegal discrimination, is recommended. When circumstances permit, this should go beyond a traditional fair-lending assessment and include using “mystery shoppers” to measure the customer experience and determine whether similarly situated borrowers are, in fact, treated the same. Serious consideration should be given to performing fair-lending reviews under attorney-client privilege to provide for careful review of findings that could be detrimental to the institution.
Model validation: Models used for lending purposes should be subject to rigorous review and independent validation to confirm that they do not result in disparate impact on protected classes. The growing use of artificial intelligence and machine learning has heightened regulators’ attention to lending models, increasing the pressure on institutions to ensure they understand and can explain every facet of their models.
Call-center monitoring: Financial institutions should perform targeted call-center monitoring and assess complaints and customer feedback specifically related to business services impacted by COVID-19. Reviewing complaint data frequently will help institutions flag emerging compliance issues. For example, was the institution’s online app inaccessible following an update? With some branches closed or with limited operation, how effective were customer service representatives in explaining the bank’s virtual business model?
Regulatory mock exam: For all portfolios, financial institutions should consider conducting a mock exam specific to fair and unbiased lending practices. As part of this effort, banks should compare year-over-year results to understand current performance levels and the state of their customer management system. Financial institutions should also assess whether standard controls, including policies and procedures, require updating as a result of the pandemic’s impact.
Disparate treatment has hurt financial inclusion
The arrival of COVID-19 in early 2020 elevated concerns about disparate treatment based on race, ethnicity, gender and other considerations, as many banks temporarily suspended access to physical locations and thus limited “access to credit” for certain customers.
Even though many financial institutions shifted product and service offerings online, the changes negatively affected consumers who do not own a smartphone or lack access to high-speed internet service and bandwidth. It also is important to note that not all banks have a dedicated smartphone application and not all were able to ramp up customer-service capacity.
The post-pandemic path forward will present challenges for lenders. Pressure to tighten credit requirements as loan default rates escalate, the possible return of enforcement power to the Consumer Financial Protection Bureau’s fair lending office, and renewed enforcement activity by other regulators will likely mean greater risk of fair lending and servicing violations.
The CFPB and other regulators have indicated that enforcement actions during COVID-19 will take into account the unprecedented nature of the crisis, which precipitated many of the unintended customer experience challenges. Still, regardless of whether institutions face enforcement action, there is an opportunity now for many to look closely at their practices, assess where they may have fallen short of their obligations to customers, and make a good-faith effort to enhance compliance based on the assessment.
In this environment, maintaining appropriate fair and unbiased lending practices and doing the right thing must remain paramount. Meeting the needs of customers is more challenging than ever, but with diligent review and monitoring of foundational policies and procedures, this undoubtedly can be achieved.