When The Examiners Speak You Should Listen
Blair Rugh, Chief Compliance Advisor, discusses why you should be paying attention to the Federal Reserves new bulletin.
The Federal Reserve has begun issuing a new publication titled, “Consumer Compliance Supervision Bulletin”. Its purpose is to alert banks and bankers about compliance violations that its examiners are seeing and practical steps that banks can take to address the issues. If the federal government thinks that an issue deserves to be highlighted in its publication, then it is probably seeing fairly frequent violations and it is an issue that examiners will be focusing on.
Not surprisingly, the two issues featured in the ﬁrst bulletin are Fair Lending and UDAAP. The ﬁrst fair lending issue discussed was redlining. Surprisingly, the concept of redlining was created by the federal government. After the great depression, the government created the Home Owners’ Loan Corporation to stabilize housing markets. To do that, it had to identify the riskiest neighborhoods which it did by redlining primarily minority areas in 200 cities. These classiﬁcations were later adopted by both the FHA and the VA. Many banks adopted the same guidelines which denied credit to those areas. The riskiness identiﬁed by the government therefore became a self-fulﬁlling prophecy.
While redlining is seldom intentional it can fairly easily happen inadvertently. The best thing that a bank can do is compare its volume of lending in minority census tracts against that of its competitors. This entails comparing your HMDA data against the other institutions in your area. Your examiners will do this comparison, so you need to know what their results may be so that you can take steps to correct any discrepancies before they are found. Examiners will also look at your branch dispersion and your branching strategy and, similarly, your marketing strategy to see that you are not purposely avoiding minority populations.
Some banks oﬀer small-dollar loan products to assist low-income borrowers. The loans are usually in the range of a few hundred to a thousand dollars. Generally, these loans are at best break even from a proﬁtability standpoint, but they are part of a bank’s eﬀorts to assist low and moderate income customers. This can be problematic when loan pricing is left to the loan oﬃcer’s discretion. The government suggests that when banks oﬀer this product they also provide rate sheets that clearly describe the pricing decision criteria. The bulletin also discusses discrimination against the handicapped and persons on maternity leave.
On the UDAAP front, the federal government’s target concern was with student loan lenders and servicers, particularly those who had contractual arrangements with colleges and universities. The second issue was with overdraft programs. One issue in particular was banks that charge an overdraft on a POS transaction that was approved at the time it was transacted because the balance in the account was suﬃcient but in an overdraft position at the time that the transaction was presented to the bank. The government found this to be a misleading and deceptive practice and a violation of Section 5 of the FTC Act.
Another issue raised by the federal government was misrepresentations by loan oﬃcers. Apparently, the government has seen several instances where a loan oﬃcer has represented to a borrower that if he or she did certain things he or she would qualify for a loan when that was not the case. Loan oﬃcers were discouraged from telling a borrower the, “you are a perfect candidate” or “qualifying you will not be a problem”. A loan oﬃcer should refrain from representing to a consumer that they do or will qualify for a loan until the loan qualiﬁcation is certain.
I encourage compliance folks to read all of the guidance documents that the regulators publish and to focus on the issues that aﬀect their institutions and products. If a regulator is concerned enough about an issue to write about it, it will probably be on your next examination.