Focus on Fair Lending Exam Hot Spots

NCUA emphasizes three recurring issues as it continues risk-based examinations.

June 01, 2014
KEYWORDS exam , fair lending , HMDA , lending
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NCUA again will take a risk-based approach to selecting federal credit unions for fair lending exams and off-site supervision contacts this year, and the agency has defined three common trouble spots.

According to the March 2014 edition of The NCUA Report, the agency’s examiners have found inadequate “fair lending compliance management programs” in some credit unions, data quality errors in Home Mortgage Disclosure Act (HMDA) reports, and compliance issues involving the management of third-party relationships.

NCUA plans to conduct 25 on-site fair lending exams and approximately 50 off-site supervision contacts this year.

Federal credit unions selected for the specialized exam will have demonstrated the potential for a higher fair lending risk based on multiple factors, including:

  • HMDA data indicating the federal credit union’s lending practices fall outside the normal range for pricing, denials, withdrawals, or lending terms when compared with other financial institutions, also called “HMDA outliers.”
  • Fair lending findings or violations noted in recent safety and soundness exams. This includes a review of the number of compliance exceptions for fair lending or other consumer lending regulations.
  • Moderate or high risk ratings on compliance issues during the credit union’s most recent safety and soundness exam.
  • Other factors, such as whether a federal credit union demonstrates the potential for higher fair lending risk because of the volume, type(s), or complexity of the products and services offered, types of communities served, and whether the federal credit union has been the subject of lending discrimination complaints.

NCUA’s Office of Consumer Protection will provide advance written notification of a fair lending exam or off-site supervision contact.

Examinations include a transactional review of fair lending risk factors plus a review of the credit union’s fair lending compliance management system.

NCUA conducts its fair lending compliance exams in accordance with the Federal Financial Institution Examination Council’s Interagency Fair Lending Examination Procedures.

The exam procedures contain a detailed checklist examiners use to evaluate the strength of an institution’s fair lending compliance. Credit unions should review this checklist as they evaluate their policies and procedures in anticipation of an exam.

The purpose of fair lending laws

As explained in NCUA’s Fair Lending Compliance Best Practices for Federal Credit Unions, “fair lending laws are designed to provide fair and equal access to credit, based on individual creditworthiness, without regard to a prohibited basis such as race, gender, or national origin. In addition to satisfying legal requirements, fair lending compliance is good business practice, and there can be major consequences for noncompliance.”

Fair lending laws include:

  • Equal Credit Opportunity Act (ECOA), Regulation B, which prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, including extensions of credit to small businesses, corporations, partnerships, and trusts.
  • HMDA, Regulation C, which requires financial institutions to compile and disclose data about home purchase loans, home improvement loans, and refinanc-ings that they receive an application for, originate, or purchase.
  • The Fair Housing Act, implemented by NCUA and Department of Housing and Urban Development regulations, which prohibits discrimination in all aspects of residential real estate-related transactions.

Potential problem areas

While examiners will conduct a thorough review of a credit union’s entire operation from a fair lending perspective, NCUA has identified three areas of particular interest.

1. Fair lending compliance management program. According to NCUA’s Office of Consumer Protection Report, an inadequate fair lending compliance management program “limits a credit union’s capacity to prevent, identify, and self-correct violations.”

To ensure compliance with fair lending laws, a credit union should develop and implement a fair lending compliance program that includes:

  • Written fair lending policies and procedures;
  • Fair lending risk assessments, conducted periodically;
  • Training for all employees and officials involved in the lending process;
  • Ongoing monitoring of lending practices;
  • An audit and review function to evaluate the effectiveness of the fair lending compliance program; and
  • Oversight by management and the board of directors. These activities should be appropriate for the size and complexity of the credit union.

2. HMDA reporting. NCUA continues to find data quality errors in HMDA reports, such as recording incorrect information or omitting reportable loans on the HMDA Loan Application Register.

NCUA has stressed that credit unions make sure the employees responsible for HMDA reporting receive the appropriate training, and establish a verification system to test HMDA data to cut down on these errors.

Correct these errors so HMDA data can be used to perform a thorough fair lending analysis as part of the credit union’s fair lending compliance management program.

3. Managing third-party relationships. Fair lending compliance issues can occur when credit unions contract with third parties to perform services and fail to provide proper oversight of the relationship.

For instance, both NCUA and the Consumer Financial Protection Bureau (CFPB) have expressed concerns about “auto dealer markups,” which occur when indirect auto lenders allow the dealer to charge the consumer an interest rate that exceeds the rate the lender gave the dealer. The lender shares part of the revenue from that increased interest rate with the dealer.

According to the CFPB, these practices might lead to minorities being charged higher markups than other, similarly situated consumers, which violates the ECOA and Regulation B.

So some institutions might want to re-examine their indirect auto lending practices in light of this increased scrutiny.

VALERIE Y. MOSS is CUNA’s senior director of compliance analysis. Contact CUNA’s compliance department at

For more information on this topic, check out these resources:

CFPB's Bulletin 2013-02: Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act

FFIEC's Guide to HMDA Reporting: Getting It Right!

NCUA's Letter to Credit Unions 07-CU-13: Evaluating Third Party Relationships

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