Introduction to the Toolbox

Introduction to the Toolbox

ABA

Toolb

x

on Fair Lending

TO: ABA Member Bank CEOs

FR: Albert C. “Kell” Kelly, ABA Chairman

No one wants to learn compliance the hard way—that is, no one wants to have their examiner tell them what they were supposed to have done. We all want to know the rules and criteria for an exam before it takes place, not after.

That is why ABA is offering you this new Fair Lending Toolbox. Fair lending examination procedures and enforcement have evolved over the past 20 years, since our first such toolbox was produced. And a number of cases brought recently by the Justice Department have made some banks anxious to know if their fair lending compliance programs are keeping pace with the latest legal interpretations.

This goal of this toolbox is to help ensure that your institution is in sync with examiner expectations so that you get the sort of compliance credit you deserve. In today’s not-always-predictable exam environment, that may seem a lofty goal. But ABA’s staff experts have collaborated with expert consultants and lawyers to produce an authoritative resource that, if utilized, should help you sleep at night, assured that you are not only lending fairly, but that you also will be seen by examiners as doing so.

In typical ABA Toolbox fashion, this toolbox provides practical how-to’s, templates, examples and insights for you to consider as you review your

compliance program. I encourage you to take full advantage of it and other free, members-only resources—all of which are aimed at helping you build on your bank’s success.

Introduction: The Natural State of Bank Credit | 3

Special Thanks

The production of a toolbox takes a huge joint effort on the part of bankers, consultants, and ABA staff. We would like to recognize all who have taken part in this process from initial concept to delivery.

Rick Freer Richard Riese

Deanne Johnson de Mariño Jim Chessen Ellen Collier Samantha Dalessio Susan Einfalt Jackie Jablonka Grace Marasigan Robert Rowe Amy Wertlieb Ryan Zagone Andrea Mitchell Buckley Sandler Carl Pry Treliant Jon Allen

Vice President and Chief Compliance Officer Bank of American Fork

American Fork, Utah

Cynthia L. Crane

Vice President and Compliance Officer The Park National Bank

Newark, Ohio

Kathy Curtis

Senior Vice President and Chief Risk Officer Capital Bank

Rockville, Maryland

ABA Staff Contributors Consultants

Banker Reviewers

We also wish to thank all of the bankers who attended the NCCB session: Succeeding in the New Fair Lending Environment. These bankers reviewed the initial outline of the toolbox and Tool 1, providing valuable feedback.

4 | ABA Toolbox on Fair Lending

ABA Toolbox

on Fair Lending

In response to industry concerns about increasing scrutiny of bank fair lending compliance, ABA has prepared a Toolbox to guide banker compliance efforts. In association with Treliant and the Buckley Sandler law firm, ABA has created a series of Tools that provide a guide to board responsibilities, fair lending legal fundamentals, a framework for conducting fair lending risk assessments and

devising compliance programs, as well as instructions for conducting comparative file analysis, running second look programs and

managing the supervisory exam.

Fair lending is a topic that has been prominent on the regulatory radar scope for over 40 years. As fair lending legal standards have evolved over the years, the subject has often stimulated banker questions and concerns, especially heading into an exam. Despite (or perhaps because of) this prominence, the banking industry has a strong track record of fair lending compliance which we should recognize. Even as Assistant Attorney General Tomas Perez has observed, “... the success of thoughtful and comprehensive compliance work and the attention to fair lending is reflected in the fact that the vast majority of lenders are not violating the law.”

Banks strive to make loans to any and all qualified borrowers. Bankers make credit decisions using sound underwriting and pricing criteria applied similarly to similarly situated applicants without regard to any legally prohibited basis. Fair lending, then, is the natural state of bank credit operations.

The ABA Toolbox on Fair Lending will help institutions review the systems they have in place to continue their strong record of compliance and help document the performance the regulators are looking for. ABA developed its first fair lending toolbox in the early 1990s. This Toolbox is a refresher that covers developments in the intervening years and leverages experience of bankers living under the 1999 Interagency Fair Lending Examination Procedures. If bankers follow the practical advice and suggested framework in this Toolbox for fair lending compliance, they should be able to demonstrate their successful fair lending story to examiners.

A

ssess

the fair

lending risk profile of your operations and the risk exposure after applying your SMAART program to identify gaps.

D

evelop

the program improvements necessary to address any compliance program gaps.

Ap

ply

new program components in accordance with the priority derived from your assessment and train staff accordingly.

T

est

program changes to assure they have been implemented as intended.

Introduction: The Natural State of Bank Credit | 5

A

Assessment

Accountability

A

M

Monitoring

Response

R

S

Systems

Training

T

C

O

M

M

U

N

IC

A

T

IO

N

C

O

N

T

R

O

L

S

C U LT U R E

A A

M

R

S

T

C O M M U N IC_A T IO N CO NT RO LS C U LT U R E

A

A

M

R

T

S

A SMAART Fair Lending

Compliance Management System

If bankers follow the practical advice and

suggested framework in this toolbox for fair lending compliance, they should be able to rest easy at night and demonstrate their successful fair lending story to examiners. In turn, bankers can expect less pressured full-scope fair lending examinations and experience more streamlined examinations.

The materials discussed in the Toolbox are scalable to financial institutions of all sizes, complexities, and organizational structures. We understand that financial institutions are all different due to their business strategy, risk appetite, risk exposure, markets, and products. Therefore, financial institutions can ADApT the tools in the Toolbox to their specific situation and tailor the templates to meet their specific requirements. This is no “one-size-fits-all” approach.

Like any good toolbox, ABA has not only provided the basic tools, we have left space to add tools in the future. Launched with a dedicated web support page, this Toolbox will enable you to keep pace with developments in fair lending law and to acquire new ABA tools that can help you with specialized situations.

ABA has also launched a discussion section of the ABA Compliance Network covering Fair Lending and the ABA Fair Lending Toolbox.

6 | ABA Toolbox on Fair Lending

Toolbox Overview

There are six tools in the toolbox. Each of them begins with a glossary of important terms that are used in that tool. The tools focus on helpful suggestions, so that your institution can be assured it is complying with fair lending regulations.

Tool 1:

The Board’s Role in Fair Lending Compliance

This tool sets the foundation by explaining that fair lending is fundamentally the application of objective, safe, and sound lending criteria to all applicants that are equally qualified. A board that holds its management and lending staff to this simple maxim is well positioned to achieve success in fair lending compliance. Board members should understand the sources of fair lending risk within the context of their bank’s lending operations and the controls applied to manage those operations.

All business, but especially the business of banking, is an exercise in risk management. The framework for this exercise involves a common set of activities: Systems of procedures for conducting the business; methods for

Monitoring or managing the execution of those systems; Assessments of performance in adhering to the systems and the resulting risk exposure;

Accountability of management and staff for their performance; Responsiveness that corrects deficiencies or addresses complaints; and Training of personnel to meet system standards and develop necessary subject-matter expertise. It is therefore appropriate that this SMAART framework be applied to bank efforts to manage fair lending risk.

Tool 2:

Legal Foundations

The foundation for fair lending legal obligations is based on two federal statutes that specifically prohibit discrimination in lending: the Equal Credit Opportunity Act and the Fair Housing Act.

Tool 3:

A SMAART Process for Fair Lending Risk Assessments

It makes good business sense to understand the level of the fair lending risk an institution is willing to assume, how well it manages that risk, and the likelihood that it is complying with fair lending laws and regulations. Understanding and managing fair lending risk also helps the institution in the examination process. This tool provides a framework for capturing and identifying your risk profile and determining your risk exposure after your compliance program controls are applied. The tool naturally leads you to conclusions about what your bank does well and where it needs to improve.

A

Assessment Accountability

A

M

Monitoring Response

R

S

Systems Training

T

C

O

M

M

U

N

IC

A

T

IO

N

C

O

N

T

R

O

L

S

C U LT U R E

A A

M

R

S

T

C O M M U N IC A T IO N CO NT RO LS C U LT U R E

A

A

M

R

T

S

Introduction: The Natural State of Bank Credit | 7 © 2012 American Bankers Association, Washington, D.C.

Tool 4:

Conducting a Fair Lending Comparative File Review

This tool describes a comparative file review as a process to compare similarly qualified applicants to ensure that any dissimilar treatment is not related to a prohibited basis such as sex or race. Results of comparative file reviews help financial institutions ensure:

• All applicants received a comparable level of assistance during the application process;

• The credit decision for similarly qualified applicants was the same;

• The terms and conditions granted to similarly qualified applicants were substantially the same by product type; and

• Whether any corrective or remedial action is necessary.

Tool 5:

Second Look Programs

A second review program is a method banks can use to review denied loan applications prior to notifying an applicant by an adverse action notice. While there is no requirement that institutions develop second review

programs, they are an easily adopted process; even for very small institutions. These programs act as a preventive control to ensure all creditworthy

applicants get approved for loans and that denial decisions are not based on a prohibited basis. They can result in suggested changes in underwriting standards or loan processing activities, increased institution lending

volume, and employees understanding the board and senior management’s commitment to fair lending principals.

Tool 6:

Fair Lending Examination Management

The preparation for the fair lending examination began when the institution conducted a risk assessment and then followed-up, as needed, with risk management tools like a comparative file review or a second review program. Because of this work the institution has the tools and information needed to effectively manage the examination rather than the examination managing the institution. This tool will assist your bank to be ready ahead of the exam and provide pointers for handling the exam from initial letter to exit interview.

Being SMAART about fair lending is one example of the ABA approach to good compliance practice. We will continue to develop the SMAART and ADApT frameworks, because we believe that in this world of regulatory expansion, SMAART ADApTation is how you can best achieve change management for compliance fitness.