Compliance Blog

A few weeks ago, I blogged about NCUA’s strategy to examine credit unions for fair lending issues, and the agency’s focus on pandemic-related loan accommodations. However, the rise in fair lending focus is not a pandemic-specific, as it appears the agency has been steadily increasing its volume of fair lending exams over the past few years. However, this does not mean that credit unions have had more fair lending issues.

We have heard from a few credit unions about their experiences with NCUA’s fair lending exams and compared these insights to what NCUA has described in its letter to federal credit union’s regarding its fair lending exam program, which was published in 2013. In short, it appears that NCUA has increased its capabilities and readiness to conduct separate on-site (or virtual) fair lending exams in recent years.

Selection Process

NCUA’s letter states “NCUA will use multiple factors to determine whether a federal credit union demonstrates the potential for higher fair lending risk which could lead to a fair lending exam.” These factors are:

·       HMDA Outliers. NCUA will review credit unions’ HMDA reports to determine if there is data that falls outside of the usual range for pricing, denial rates, withdrawals, and loan terms. A credit union may be selected for a fair lending exam if this data indicates a higher risk of violation.

·       Fair Lending Violations. A credit union which has fair lending findings or violations in its safety and soundness exam may be selected for a fair lending exam.

·       General Compliance Risks. A credit union with moderate to high risk ratings in other areas of compliance may be selected for a fair lending exam.

·       Other factors. NCUA indicated that the volume, type, and complexity of a credit union’s loan offerings may be a factor. NCUA will also consider the make-up of the community the credit union serves, as well as any fair lending complaints submitted by members.

In the years after the 2013 letter was published, it appeared that the first two factors were heavily relied on in determining which credit unions were selected for a fair lending exam. Credit unions could readily determine whether their HMDA anomalies or exam findings would lead to a full-scale fair lending exam. However, in hearing from credit unions more recently, it appears that NCUA is considering the last two factors more critically. For example, even if a credit union has spotless HMDA data and no previous findings, the size and scope of its lending practice may lead NCUA to conduct a fair lending exam. The demographics of a credit union’s market may also be considered, and NCUA will ensure that credit unions with large groups of protected members have practices in place to ensure proper treatment of those members. This may mean that a credit union with a few billion dollars in assets in a diverse market, with a large variety of loan products is more likely to receive fair lending exams as a matter of routine, rather than an exam to address HMDA issues or cure violations.

Scope of Exam

The scope of an NCUA fair lending exam may depend on the credit union’s operations, and the reason for the exam, and may take a few weeks. The scope of these exams may be quite large, including a review of all loan products, all lending policies and procedures, advertisements, HMDA data and procedures for testing, and reviews of complaints. Details about the appropriate scope of a fair lending exam can be found in the Interagency Fair Lending Examination Procedures, which was published in 2009. The procedures state examiners should focus their review on products that were not reviewed in the most recent exam, protected groups that make up a significant portion of the credit union’s membership, and products or groups that have been the focus of the credit union’s self-testing. However, this guidance is a bit dated and examiners may now be focused on more than these items. Due to the amount of data and documents needed to conduct the review, NCUA has increased its use of technology and automation capabilities to be able to collect data and more quickly flag possible questions for the credit union.

Additionally, NCUA seems to have an increased interest in employee and board training, and may review the training documents and schedules used for ensuring credit union employees are periodically trained on fair lending issues. During a fair lending exam, this review may include evidence of group-specific training for compliance, marketing, front-line staff, loan originators, management, and any other group that plays a role in the lending process.

Ultimately, a credit union that is scheduled for a fair lending exam should speak with the NCUA examiners to determine the scope of the exam in order to be prepared. However, all credit unions may want to ensure policies, practices, and training for employees is up-to-date and align with guidance issued by NCUA.