NCUA again will take a risk-based approach to selecting federal credit unions for fair lending exams and off-site supervision contacts this year, and the agency has defined three common trouble spots.
According to the March 2014 edition of The NCUA Report, the agency’s examiners have found inadequate “fair lending compliance management programs” in some credit unions, data quality errors in Home Mortgage Disclosure Act (HMDA) reports, and compliance issues involving the management of third-party relationships.
NCUA plans to conduct 25 on-site fair lending exams and approximately 50 off-site supervision contacts this year.
Federal credit unions selected for the specialized exam will have demonstrated the potential for a higher fair lending risk based on multiple factors, including:
NCUA’s Office of Consumer Protection will provide advance written notification of a fair lending exam or off-site supervision contact.
Examinations include a transactional review of fair lending risk factors plus a review of the credit union’s fair lending compliance management system.
NCUA conducts its fair lending compliance exams in accordance with the Federal Financial Institution Examination Council’s Interagency Fair Lending Examination Procedures.
The exam procedures contain a detailed checklist examiners use to evaluate the strength of an institution’s fair lending compliance. Credit unions should review this checklist as they evaluate their policies and procedures in anticipation of an exam.
The purpose of fair lending laws
As explained in NCUA’s Fair Lending Compliance Best Practices for Federal Credit Unions, “fair lending laws are designed to provide fair and equal access to credit, based on individual creditworthiness, without regard to a prohibited basis such as race, gender, or national origin. In addition to satisfying legal requirements, fair lending compliance is good business practice, and there can be major consequences for noncompliance.”
Fair lending laws include:
Potential problem areas
While examiners will conduct a thorough review of a credit union’s entire operation from a fair lending perspective, NCUA has identified three areas of particular interest.
1. Fair lending compliance management program. According to NCUA’s Office of Consumer Protection Report, an inadequate fair lending compliance management program “limits a credit union’s capacity to prevent, identify, and self-correct violations.”
To ensure compliance with fair lending laws, a credit union should develop and implement a fair lending compliance program that includes:
2. HMDA reporting. NCUA continues to find data quality errors in HMDA reports, such as recording incorrect information or omitting reportable loans on the HMDA Loan Application Register.
NCUA has stressed that credit unions make sure the employees responsible for HMDA reporting receive the appropriate training, and establish a verification system to test HMDA data to cut down on these errors.
Correct these errors so HMDA data can be used to perform a thorough fair lending analysis as part of the credit union’s fair lending compliance management program.
3. Managing third-party relationships. Fair lending compliance issues can occur when credit unions contract with third parties to perform services and fail to provide proper oversight of the relationship.
For instance, both NCUA and the Consumer Financial Protection Bureau (CFPB) have expressed concerns about “auto dealer markups,” which occur when indirect auto lenders allow the dealer to charge the consumer an interest rate that exceeds the rate the lender gave the dealer. The lender shares part of the revenue from that increased interest rate with the dealer.
According to the CFPB, these practices might lead to minorities being charged higher markups than other, similarly situated consumers, which violates the ECOA and Regulation B.
So some institutions might want to re-examine their indirect auto lending practices in light of this increased scrutiny.
VALERIE Y. MOSS is CUNA’s senior director of compliance analysis. Contact CUNA’s compliance department at firstname.lastname@example.org.
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