FAIR LENDING - DOCUMENTING EXCEPTIONS TO CREDIT STANDARDS TO MITIGATE FAIR LENDING RISK

The Consumer Financial Protection Bureau (CFPB) examination teams have observed instances in which financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.  For example, a lender may decide not to apply certain credit standards to a borrower when there is a competing offer from another institution.  Such decisions are appropriate where they are based on a legitimate justification, but it is important to maintain adequate documentation and oversight to avoid increasing fair lending risk under the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. 

At the same time, the CFPB recognizes the purpose of Regulation B in promoting the availability of credit without regard to prohibited basis characteristics.  A lender may promote the availability of credit by providing credit to an applicant based on a lawful exception to the lender’s credit standards when exceptions practices are complemented by an appropriate system of fair lending compliance management.  A strong compliance management system can also mitigate fair lending risk related to credit exceptions by adequately documenting the basis for the credit exception, monitoring and tracking exceptions activity, and controlling any resulting fair lending risk.

A strong compliance management system often includes the following fair lending-related elements:

Policies and procedures

  • Granting exceptions: policies and procedures that specifically define the circumstances when the institution allows exceptions to be made to its credit standards.  For example, a lender may have policies that permit pricing exceptions so that the lender can meet the rate in a competing offer, in appropriate circumstances.

  • Documenting exceptions: policies and procedures that require, for each applicant offered an underwriting, pricing or other exception, documentation appropriate to that specific exception that is, at a minimum, sufficient to effectively monitor compliance with the exceptions policies.  Such documentation should be sufficient to explain and provide details regarding the basis for granting any underwriting or any other exception.  As such, the lender’s policy for documenting exceptions should require more than a records notation that identifies or lists only the policy basis for the exception.  Records should provide details and/or documentation of the particular circumstances of the exception.

  • Record retention: document retention requirements should, at a minimum, correspond with the record retention obligations of Regulation B, which generally requires retention, for twenty-five months, of certain records related to a non-business credit application.

Monitoring, audit, and corrective action

  • Monitoring: ensure regular monitoring of compliance with all exceptions policies, including exceptions documentation.

  • Audit: conduct periodic audits for compliance with all policies and procedures relevant to granting exceptions, and to test for and identify fair lending risk.

  • Corrective action: take appropriate corrective action for noncompliance with exceptions policies or procedures, or if internal monitoring and audits identify areas of fair lending risk.

Training

  • Provide training for all relevant individuals related to these policies and procedures.

Management participation

  • Provide for management and/or board oversight, as appropriate, of relevant policies and procedures.

The CFPB recognizes that each lender is different and that an effective compliance management system may take different forms depending on many factors, including the size and complexity of the lender’s business.  However, the successful implementation of the recommendations identified above will assist lenders in mitigating fair lending risk when making exceptions to credit standards while also furthering the purposes of Regulation B in promoting the availability of credit.

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