Additional Indicators and Factors to Consider for Fair Lending Risk Assessment

The following represent a number of questions you may wish to add to your fair lending risk assessment. Clearly not every question that could be asked is listed in the various risk sources or in the SMAART compliance program factors. But the questions that follow should provide you a strong foundation from which to build your unique fair lending risk assessment for your bank. Where necessary, you should develop additional questions that specifically apply to your bank and the fair lending issues you must manage.

The questions below are organized by the risk sources and SMAART factors described and discussed in the Fair Lending Risk Assessment Tool. Some questions depending on the way they are worded can apply to more than one risk category and even different SMAART factors. If you see questions in one category that you believe you can use in another category that is OK. As stated in the Tool, there is no set format for conducting a fair lending risk assessment and set of specific questions you can ask in documenting your risk profile or identifying you fair lending risk exposure.

Risk Source 1: Retail Footprint and Marketing Strategy

Market Circumstances

1.  How diverse are the borrower characteristics in the markets covered by your retail footprint or the geographic areas adjacent to your footprint?

2.  Does the bank’s CRA-delineated assessment area exclude any adjacent low- or moderate-income geographies?

3.  Does the bank modify its lending activities to react to the local economy?

4.  Do the bank’s strategic growth plans reflect community growth and demographic trends?

5.  Do unexplained lending gaps exist within your market area?

6.  Do community groups in your market area express concern about adequacy of lending?

7.  What is the demographic make-up of your existing portfolio versus new loans coming in?

8.  Do the demographics of the portfolio match the community demographics?

9.  Are there conspicuous lending gaps within your service area?? Are there reasons that explain why?

10.  Are there demographic shifts in the community that are not reflected in census data?

11.  How does the local economy and competition impact your lending activities?

12.  How consistent is the demographics of the loan portfolios with community demographics and identified credit needs?

13.  How diverse are the borrower characteristics in the markets covered by your retail footprint or the geographic areas adjacent to your footprint?

14.  Are market area determinations based on ZIP codes or census tracts rather than MSAs or larger geographical subdivisions when considering HELOC modifications?

Delivery Channels

1.  What delivery channels exist and do products or product terms vary by channel?

2.  Does the bank have operating subsidiaries or loan production offices that originate loans using incentives or standards different from that of the bank?

3.  Are underwriting and pricing standards consistent among lending channels and bank lending centers?

4.  Are there any disparities on a prohibited basis by lending channels that originate the same product?

5.  Does loan product marketing vary by geographic area or delivery channel? Is so, why and does it influence the products that are available to potential borrowers who may have differing prohibited basic characteristics?

6.  Does any credit administration activity, such as application processing, servicing, loss mitigation, etc. vary by any delivery channel?

7.  Does the bank have a wholesale lending operation which services a larger geographic area than the bank’s retail branch footprint?

8.  Do underwriting terms for the same product vary depending on the delivery channel?

Production Complexity

1.  Does the bank only offer a traditional mix of non-complex loan products?

2.  Are special prices, products, or services offered in some markets and not others?

3.  Do different loan products penetrate geographic or borrower markets differently?

4.  Is the bank using sophisticated lending platform technology to support loan production?

5.  Are standards for referring applicants to other product choices, subsidiaries, or other lending channels clear, objective, and consistently applied?

6.  Does the bank’s volume of and options for consumer, small business, and commercial lending match its business strategy throughout its market area?

7.  Does the bank have a significant and explainable volume of consumer lending? Small Business lending?

8.  Do credit administration changes impact only certain products or services?

Marketing

1.  Has the marketing and advertising media used varied recently?

2.  Have new or different product sets been marketed and were they marketed throughout your market area?

3.  Has marketing or advertising coverage within your market area changed recently?

4.  Is marketing done in languages besides English?

5.  Do marketing and advertising materials vary to promote special or limited time offers?

6.  Is your level of marketing and advertising tailored or targeted to address market competition?

7.  What types of media are utilized?

8.  Is scripting for tellers or telephone sales representatives used?

9.  Have the materials been reviewed prior to implementation?

10.  What level of advertising is used to address market competition?

11.  What loan product or service marketing is performed?

12.  Would a reasonable person believe that your advertising patterns or practices indicate certain customers are less desirable?

13.  Do you advertize only in media serving particular racial or national origin areas of the market?

14.  Does marketing through brokers or other agents that the bank knows (or has reason to know) serve only one racial or national origin group in the market?

15.  Do you use marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the bank's assessment or marketing area that have significantly higher percentages of residents of a particular racial or national origin group than does the remainder of the assessment or marketing area?

Risk Source 2: Degree of Credit Administration Discretion Allowed

Lending policies and procedures approved by credit administration

1.  Are credit operations centralized or decentralized?

2.  Have credit administration guidelines, policies, and standards changed recently in any credit administration activity?

3.  Are credit administration policies, procedures, and standards in each credit administration activity clear and objective, and communicated to appropriate staff?

4.  Do procedures articulate expectations for providing consistent applicant/borrower assistance in each credit administration activity?

5.  Are actual practices used in each credit administration activity consistent with established policy, procedure, or standard?

6.  Are policies, procedures, and practices in each credit administration activity devoid of any overt discriminatory language, stereotypes, or geographic limitations?

7.  If credit administration is decentralized, are products or services for separate operating centers evaluated separately.

8.  If credit administration is decentralized, how effective is the enterprise-wide control environment?

9.  Are loan applicants referred to other products that may be less advantageous or that are priced higher?

10.  Are loan applicants referred to products in other lending channels?

11.  Have credit administration policies, procedures, standards, or guidelines changed recently?

12.  Are all credit administration personnel aware of changes to policies, procedures, standards, or guidelines?

13.  Are credit administration policies, procedures, standards, or guidelines easy to incorporate into daily operations?

14.  Are pricing and other terms and conditions standards objective?

15.  Are underwriting criteria vague or subjective?

16.  Are lending–related policies, procedures, and practices clear and objective?

17.  Is loan underwriting centralized or decentralized?

18.  Does credit administration employ automated underwriting standards?

19.  Are scoring systems used in any aspect of the credit transaction (underwriting, pricing, servicing, waivers, credit line increases, and so forth)?

20.  Do the automated scoring system cutoff scores appear objective and based in solid financial decisioning?

21.  Are automated scoring systems used for all applications of the same type?

22.  Are escrow account procedures clear and objective?

23.  Is fair lending part of product development and approval processes?

Degree of discretion in credit administration process

1.  What amount of judgment or discretion can credit administration staff exercise in making decisions?

2.  Does the degree of permitted discretion change by geographic area, delivery channel or credit activity – application processing, underwriting, loss mitigation, servicing, etc.?

3.  Can the exercise of discretion impact lender or other staff compensation?

4.  Do lenders or other staff involved in different credit activities – application processing, underwriting, servicing, etc. - document their exercise of discretion?

5.  Are criteria that guide lenders and other staff discretion clear and objective, and how are the criteria communicated to appropriate staff?

6.  Are there disparities in the level of permitted discretion exercised in each credit administration activity by prohibited basis characteristics?

7.  Are pricing policies and guidance for discretion objective?

8.  Are corrective actions taken when discretion errors or missteps are found?

9.  Is lender discretion covered in bank policies and procedures

10.  Does the practice of exercising discretion vary from formal policy and procedure?

11.  How objective are the criteria that guide originator discretion and how are they communicated?

12.  Do files contain sufficient information to document lending decisions?

13.  Are loan underwriting standards explicit and do they provide objective guidance for any discretion given to the lending staff?

14.  Are the controls in default management and loss mitigation tightly managed or is there a large amount of discretion allowed for servicers in collections, workouts, and/or foreclosures or repossessions?

Lending results

1.  Do unexplained approve/deny disparities on a prohibited basis exist by loan product or credit administration activity?

2.  Do unexplained pricing and other terms and conditions disparities on a prohibited basis exist by loan product or credit administration activity?

3.  Do unexplained disparities among application processing times (in any credit administration activity) exist by prohibited basis group?

4.  Is there a difference in the proportion of approved not accepted and withdrawn/incomplete applications by a prohibited basis group?

5.  Are there disparities in the percentage of prohibited basis group applicants in loan products or products with specific features relative to control group applicants?

6.  Do you have disparities in the percentage of prohibited basis group applicants/borrowers in specific credit products, servicing activities, or loss mitigation solutions, for example, compared to the percentage of prohibited basis group applicants/borrowers offered different options or solutions?

7.  Are there any disparities on a prohibited basis by lending channels that originate the same product?

8.  For different loan products offered based on credit risk levels, are there any disparities by each loan product category on a prohibited basis?

9.  If you acquired another institution or purchased loans are like products consolidated into one portfolio such that one loan in the portfolio may have been underwritten under one set of parameters where another loan may have different parameters?

10.  Are there disparities in the incidence of rate spreads of higher-priced loans by prohibited basis characteristics as reported in your bank’s HMDA data?

11.  Are there significant differences in the percentage of prohibited basis group applicants in loan products or products with specific features relative to control group applicants?

12.  Are there significant differences, as revealed in HMDA data, in the number of applications received, withdrawn, approved not accepted, and closed for incompleteness or loans originated in those areas in the bank's market that have relatively high concentrations of residents of a particular racial or national origin group compared with areas with relatively low concentrations of residents of such racial or national origin group?

13.  Do you have significant differences between approval/denial rates for all applicants in areas with relatively high concentrations of residents of a particular racial or national origin group compared with areas with relatively low concentrations of residents of such racial or national origin group?

14.  Are there significant differences between denial rates based on insufficient collateral for applicants from areas with relatively high concentrations of residents of a particular racial or national origin group and those areas with relatively low concentrations of residents of such racial or national origin group.

15.  Does your CRA data indicate patterns of lending that differ by the concentration of residents of a particular racial or national origin group?

Risk Source 3: How Exceptions are Handled

Exceptions

1.  Is file documentation clear on why exceptions were granted?

2.  Do exceptions require pre-approval?

3.  Are loan credit and pricing/terms decision exceptions low in number and objective?

4.  Does the incidence of exceptions vary by prohibited basis characteristic?

5.  Are there particular lenders, offices, or management levels that have more or less exceptions considering the number for the overall bank? What does this mean?

6.  Are exceptions permitted in other credit administration activities and is there clear documentation to support the exception?

7.  Is the exception rate for pricing or fee waivers/charges minimal?

8.  Are exceptions not on a prohibited basis?

9.  Are corrective actions taken when exception errors or missteps are found?

10.  What is the frequency of loan credit decision exceptions?

11.  What is the frequency of loan pricing exceptions?

12.  Are there particular lenders or offices that have more or less exceptions considering the number for the overall bank? What does this mean?

13.  Are permissible loan exceptions described or well-established and is authority and instructions for documenting their exercise clear?

14.  Do policies and procedures change when exceptions become the norm?

15.  Has credit administration developed guidance for handling automated scoring system overrides and exceptions (commonly called “overlays”)?

16.  Are there any manual processes associated with your automated scoring system?

17.  Do lenders follow automated underwriting standards?

18.  What are the parameters for exceptions in using your automated scoring systems?