Fair Without Fail

Data aggregation and a proactive culture are the two biggest tools a credit union has to safeguard itself from the risk of fair lending noncompliance.

From National City Bank reportedlycharging higher mortgage rates for African-American and Hispanic borrowers, to Bank of America’s apparent refusal to consider the income of a mother on maternity leave in a couple’sloan application, fair lending foul-ups have been at the core of many prominent and shame inducing headlines over the last year.

Credit unions not only face the challenge of preventing such instances on a micro level, but also providing macro-level evidence to regulators that every component of their daily activities including mortgage, consumer, and small business lending, charge offs and collections, and even customer service and marketing have all effectively been purged of the potential for prejudices and disparities.

This may seem an impossible task given that these activities are too numerous to be tracked in a spreadsheet or boiled down to a line item on a call report. But considering that it only takes one negative instance to potentially mar both a member’s life and your brand, this is a price credit unions must be willing to pay.

That doesn’t mean that there aren’t ways to make the process easier though.

For example, while HMDA data has proven a valuable resource to demonstrate fair lending compliance in the mortgage department, next-generation analytical software can help provide a more wide-reaching, institutional approach.

For example, a solution from the Utah-based company Visible Equity which also presented at the 2014 Finovate Spring conference in San Jose last month scans data for identifying beacons like first and last name, address, zip code, and a host of other factors in order to predict whether individual members belong to a protected class of individuals (based on gender, ethnicity, age, etc.). It then organizes these members into groups to look for potential disparities, such as a group that is too far away from the average expected interest rate.

Technology can be particularly effective when it comes to pinpointing the source of such transgressions, explained Matthew Court, the company’s vice president of sales and marketing, while speaking to conference attendees.

Things may be happening from a lack of education all the way to [malicious intentions], he said.

But technology is also only as effective as the responsiveness of the institution wielding it.

Regulators may be looking at physical evidence like data and documents containing rules and standard practices to make their determination. But everyday attentiveness and ownership of these issues across the institution is the true crux of lasting compliance, and that can’t be captured in a checklist, bought off a shelf, or found on a new hire resume. It can only be learned from others.

Culture is the difference between a heirloom oak chair, hand-carved with attention and care, and an Ikea bench cobbled together hastily and with half the pieces missing. Which would you trust to support the weight of examiners, the judgement of the general public, and the good faith and trust of your members?

More compliance requirements are likely coming down the pipeline. So if the only thing you can control is your response, it makes sense to build that strategy with the best tools available and using only the utmost care.

May 22, 2014

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