Beyond regulatory compliance, fair lending fosters financial inclusion, enhances reputation, and builds long-term customer loyalty.
In today’s regulatory and social climate, fair lending is more than a compliance requirement for lenders — it's a cornerstone of ethical business and consumer trust. Lenders must adopt a comprehensive, enterprise-wide approach to fairness across the entire lending lifecycle.
What is fair lending?
Fair lending requires all individuals to have equal access to credit and financial services, regardless of race, ethnicity, gender, or other protected characteristics. It’s governed by laws such as the Equal Credit Opportunity Act and the Fair Housing Act, which prohibit discriminatory practices in lending.
Strategies to establish an enterprise-wide fair lending framework
A robust fair lending program integrates governance, risk management, and accountability at every level of the organization. Key components include:
- Board and management governance and oversight — Leadership must set the tone to embed fair lending in the culture and strategy.
- Fair lending risk assessment — Identifying inherent risks in the lending cycle, marketing, geographic, origination, servicing, collection, and payoff, along with mitigating controls, aids in right-sizing the fair lending framework.
- Policy and procedures across the lending lifecycle — From marketing to servicing, policies must be designed to prevent bias and promote equity.
- Monitoring and reporting — Regular evaluations help identify potential disparities in lending practices and outcomes.
- Training for all levels — Ongoing education for the board, management, and staff provides awareness and adherence to fair lending principles.
- Second review of denials and self-monitoring — A structured review process helps catch and correct potential issues before they escalate.
- Independent and comparative reviews — External audits and benchmarking provide objective insights into performance and compliance.
- Responsiveness to concerns —Clear channels for addressing complaints and feedback from customers and regulators.
What regulators monitor on fair lending policies
- Redlining risks — Regulators are increasingly focused on whether lenders are monitoring for redlining — discriminatory practices denying services to residents of certain areas based on race or ethnicity.
- Automated underwriting systems
- Age-based parameters — Age can’t be used inappropriately to deny or delay approvals.
- Auto-approval logic — Transparency is required around why certain applicants are excluded from automatic approval.
- Marital status proxies — Joint application processes must avoid using indirect indicators that could serve as proxies for marital status.
- Outcome-based scrutiny — Even if a loan is ultimately granted, regulators are concerned with whether the process itself treated applicants differently.
- AI-driven underwriting tools — Platforms like Zest AI, Scienaptic, and Judi AI are under the spotlight. Lenders using these tools must:
- Establish strong governance frameworks.
- Continuously monitor outcomes for fairness and compliance.
Why fair lending matters
Beyond regulatory compliance, fair lending fosters financial inclusion, enhances reputation, and builds long-term customer loyalty. Lenders prioritizing fairness are better positioned to serve diverse communities and adapt to evolving expectations.
How CLA can help lenders with fair lending
A lot goes into establishing and monitoring fair lending programs. Compliance consultants can help analyze your fair lending compliance management system, perform analysis of applications processed for redlining, underwriting, pricing, and steering risk, as well as comparative file assessments of approved versus marginally denied loan files to help demonstrate your commitment to fair lending.
CLA’s regulatory compliance professionals have more than two decades of direct experience in completing assessments under the interagency guidelines providing neutral and impartial testing services. Contact us to help analyze or establish your fair lending practices.