October 13, 2020

Fairness Gone Viral: Fair Lending Considerations for Financial Institutions Amid COVID-19

Jonice Gray Tucker, Caroline M. Stapleton

Mask? Check.

Hand sanitizer? Check.

Management of fair lending risks triggered by COVID-19? Have you checked?

The COVID-19 pandemic has had a disproportionate impact on certain protected classes in the United States, including, in particular, minority populations. Non-white populations have seen higher hospitalization rates, more deaths, and higher unemployment numbers over the past six months as compared to their non-minority counterparts.  These and other pandemic-fueled disparities are layered on top of a long history of health, wealth, and education inequality for minorities. The synergistic impact of these two trend lines holds the potential to further deepen the economic divide, positioning minority communities to have decreased access to credit and potentially less favorable terms when such credit is extended. In addition, minority consumers may encounter greater loan servicing needs as they reach out to customer service personnel and seek solutions to address temporary or permanent hardship.

Financial institutions are facing their own very real struggles as they attempt to mitigate the myriad repercussions of COVID-19. Banks are reporting deterioration in expected capital positions, an uncertain economic look, and reduced risk tolerance—classic safety and soundness concerns. Accordingly, it is not surprising that many financial institutions are tightening standards for consumer lending and taking other steps to mitigate credit risk. At the same time, they are juggling the tremendous pressures that come with servicing existing loans in these unprecedented times, including the uptick in the sheer number of consumers who need support.

Legal and compliance professionals are being called upon to identify and address current and emerging risks amid a once-in-a-generation crisis. Fair lending and fair servicing risks should be top of mind in this analysis. While prudential regulators and the CFPB have indicated that their oversight during this period will take the national emergency into consideration, we can expect that flexibility will only extend to those institutions making a good faith effort to comply with fair lending and other consumer protection laws.

FAIR LENDING REFRESHER

In connection with origination and delivery of financial services, two theories of unlawful discrimination have prevailed—disparate treatment and disparate impact:

  • Disparate treatment is intentional discrimination, and is established either by (i) an overt discriminatory act, or (ii) a comparative analysis showing different outcomes for protected class members versus their non-minority
  • Disparate impact, by contrast, is unintentional discrimination that occurs when a facially neutral policy directly causes a disproportionately negative impact on members of one or more protected classes. Such a policy may be subject to challenge unless the institution can show it is a business necessity, and that there is no other policy that could accomplish this need with a less discriminatory 

While a strong fair lending and fair servicing program controls for discrimination under both theories, it has become particularly important in the COVID-19 era to focus on disparate impacts on minority consumers, or even approaches that might be viewed as proxies for disparate treatment. Controls relating to these issues are discussed below within context of each pillar of an effective fair lending and fair servicing compliance management system (“CMS”).

BOARD AND MANAGEMENT OVERSIGHT

An institution’s Board of and senior management bear ultimate responsibility for fair lending and fair servicing compliance (hereinafter collectively “fair lending”). Setting an appropriate tone from the top can ensure that leadership’s focus on related risk management is communicated to, and shared with, all relevant employees. The Board and management also should be tuned in to fair lending trends on the rise with COVID-19, and, in particular, where minority borrowers may need additional support. Now may be the time to enhance existing reporting to ensure that these trends, as well as the results and findings of ongoing fair lending risk assessments, testing, and monitoring, are regularly provided to the senior-most leaders and to the board or appropriate subcommittees thereof.

COMPLIANCE PROGRAM 

The board and management set expectations for prioritizing fair lending compliance, but the day-to-day compliance management function typically is carried out through the four components of an institution’s compliance program:

  • Policies and Procedures. Changes to policies and procedures must be quickly vetted in this fast-moving environment, but it is equally important that they be analyzed thoroughly. For example, in view of the tightening of credit standards, are we putting in place overlays that could have a disparate impact on minority populations, or might be viewed as proxies for disparate treatment? In addition, among the most critical corners to sweep, whether in connection with existing policies and procedure or those that are new, are those areas where discretion can affect By way of example, many institutions are experiencing an abundance of servicing calls due to COVID-19-related financial impacts. Do customer service representatives have discretion to waive late fees, or to offer or recommend one loss mitigation option over another? If so, consider whether the applicable policies and procedures adequately define the parameters such that this discretion does not result in disparate impact on minority borrowers.
  • Training and Staffing. In times of crisis, consumer-facing staff are often fully occupied handling urgent customer needs. This can cause training and staffing to take a back seat. Keeping up with fair lending training should be a priority during the pandemic, even if it feels like there isn’t time, in order to ensure staff understand evolving fair lending risks and how to manage them. Similarly, ongoing evaluation of the adequacy of staffing and resources can help your institution prepare for and manage a sudden influx of consumers needing assistance, without losing focus on fair lending obligations.
  • Testing, Monitoring, and Audit. Timely evaluation of potential fair lending risk can help an institution course-correct before a pattern or practice of potentially discriminatory activity takes For this reason, institutions should consider whether additional or more frequent testing and monitoring make sense in the COVID-19 era, and for which business lines. For example, if new underwriting guidelines have been implemented, should there be a more rapid look at the populations that are being approved and declined? What about the terms on which credit is being extended? Call recordings can also be a useful backstop for identifying consumer interactions that could result in disparate treatment whether in the lending or servicing context.
  • Complaint Management. Complaint data is often among the most useful information for detecting emerging compliance trends within an institution. However, its utility is dependent on the availability and quality of complaint management capabilities, including tracking, categorization, root cause analysis, and empowering management to take action based on findings. As COVID-19 continues to cause consumer hardship, pay particular attention to complaints about loss mitigation programs, especially those that are supposed to be nondiscretionary, like CARES Act Section 4022

SERVICE PROVIDER OVERSIGHT

Regulators have made it clear that an institution can be liable for compliance violations by its vendors. As COVID-19 continues to cause upheaval, institutions may find it necessary to use vendors more frequently than usual to relieve staffing burdens, conduct default and/or REO management, and perform other tasks with considerable fair lending and fair servicing risk. Consider whether current levels of monitoring are appropriate in light of the pandemic environment, and what actions the institution is committed to taking if a significant risk or violation is identified.

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    Jonice Gray Tucker

    Founding Partner, Buckley LLP

    Jonice Gray Tucker is a founding partner with Buckley LLP and a member of the Firm’s governing board. Ms. Tucker specializes in work with banks, non-bank financial institutions, and other companies providing financial products and services. She works with some of the largest bank and non-bank financial institutions, emerging companies such as fintechs, and retailers whose business operations include consumer and commercial finance.

    Caroline M. Stapleton

    Counsel, Buckley LLP

    Caroline M. Stapleton is Counsel in the Washington, D.C., office of Buckley LLP. Ms. Stapleton represents banks and nonbank financial service providers in federal and state regulatory and enforcement matters.