Fair Lending Internal Audits ACUIA Region 6 Conference Presented By: Kristie Kenney Hoover, NCCO Internal Audit Manager, Doeren Mayhew Florida Michigan North Carolina Texas Insight. Oversight. Foresight.
Discussion Areas Workshop objectives The recent focus on Fair Lending and NCUA s role Open forum
Workshop Objectives Gain an understanding of Fair Lending as related to: Internal audit approach Internal audit fieldwork Documenting testing through audit program, worksheets, and supporting documents Communicating results Open participation
Recent Focus on Fair Lending
Recent Focus on Fair Lending National Credit Union Administration (NCUA) conducts fair lending examinations on a riskbased schedule for federal credit unions with less than $10 billion is assets. State authorities examine state-chartered credit unions with assets under $10 billion. Consumer Financial Protection Bureau (CFPB) examines credit unions with assets of $10 billion or more.
Recent Focus on Fair Lending NCUA s Letter to FCUs 13-FCU-02 outlines the Fair Lending Examination Program including educational resources, contacts, and criteria for examination. The Letter also includes NCUA s Fair Lending Guide. NCUA s Fair Lending Guide is based on FFIEC s Fair Lending Examination Guidelines (2009). NCUA also released a Fair Lending Compliance Best Practices document as well as Frequently Asked Questions document.
Recent Focus on Fair Lending Fair Lending Examinations are being conducted by NCUA Fair Lending Specialists. Lead/notification time can vary (one month to up to nine months) Onsite examination time can also vary (one week to two months) Best way to prepare is to conduct an internal audit of the Credit Union s Fair Lending compliance program.
Internal Audit Approach Items for Consideration
Internal Audit Approach When evaluating a Credit Union s Fair Lending compliance program, the following must be considered: Equal Credit Opportunity Act (ECOA)/Regulation B Home Mortgage Disclosure Act (HMDA)/Regulation C The Fair Housing Act (FHA) National Credit Administration s (NCUA) rules and regulations concerning nondiscrimination (12 CFR 701.31). Any state laws on Fair Lending
Internal Audit Approach IAs should consider that Fair Lending laws prevent discrimination on a prohibited basis including: Race or color. Religion. National origin. Sex. Age. Marital status. Familial status. Handicap. Receipt of public assistance income. Prior assertion of an applicant under the Consumer Credit Protection Act.
Internal Audit Approach IAs must take into consideration that credit unions may not do any of the following during the lending process due to a prohibited factor: Fail to provide information or services (or provide different levels of information or services). Discourage or selectively encourage potential credit applicants. Refuse to extend credit or use different standards in determining whether to extend credit.
Internal Audit Approach IAs must take into consideration that credit unions may not do any of the following during the lending process due to a prohibited factor (continued): Vary the terms of credit offered, including the amount, interest rate, duration or type of loan. Use different standards to evaluate collateral. Treat a borrower differently in servicing a loan or during a loan modification request. Use different standards for packaging a loan in the secondary market.
Internal Audit Approach IAs should take into consideration the three types of lending discrimination including: Overt evidence of disparate treatment (explicit actions that discriminate against a protected class). Comparative evidence of disparate treatment (occurs when a credit union treats applicants differently). Evidence of disparate impact (occurs when neutral policy results in protected class not obtaining same level of service or access to information). Protected classes include race, color, national origin, sex, handicap, familial status).
Internal Audit Fieldwork Procedures to be Completed
Internal Audit Fieldwork Step 1. Evaluate the Credit Union s Fair Lending Risk Assessment: The Fair Lending Risk Assessment should fully address the risk generated through the Credit Union s operations (real estate lending, consumer lending, business lending, loan servicing, collections, loss mitigation) and how well that risk is managed. The Credit Union s fair lending risk sources should be evaluated and management should determine the risk profile/risk assessment by incorporating certain attributes.
Internal Audit Fieldwork Step 1. Evaluate the Credit Union s Fair Lending Risk Assessment (continued): Does it address retail footprint and marketing strategy including: Market circumstances. Delivery channels (in-person, mail, call center, online). Production complexity. Applicant steering. Marketing.
Internal Audit Fieldwork Step 1. Evaluate the Credit Union s Fair Lending Risk Assessment (continued): Does it address the degree of underwriting and pricing discretion allowed including: Lending policies and procedures approved by credit administration. Degree of discretion in underwriting process. Lending results.
Internal Audit Fieldwork Step 1. Evaluate the Credit Union s Fair Lending Risk Assessment (continued): Does it address how exceptions are handled by the Credit Union including: Number of policy exceptions. How the Credit Union monitors and documents exceptions. Does it address the role of third-parties in lending operations including: Due diligence. Tracking and monitoring.
Internal Audit Fieldwork Step 1. Evaluate the Credit Union s Fair Lending Risk Assessment (continued): Does it address inherent risk, mitigating controls, and assign a residual risk rating? Are definitions/criteria for low, moderate, and high risk ratings documented?
Internal Audit Fieldwork Step 2. Evaluate the Credit Union s Fair Lending Policy and departmental procedures: Was the policy approved by the Board of Directors and reviewed on an annual basis? Does the policy address ECOA, HMDA, Fair Housing Act, and NCUA non-discrimination requirements adequately? Have departmental procedures been implemented to provide for consistency in the acceptance of applications, underwriting, interviewing, processing incomplete/counter offers/denials, documenting exceptions, preparing the HMDA-LAR, providing disclosures, marketing products, and responding to complaints?
Internal Audit Fieldwork Step 3. Evaluate the Credit Union s Fair Lending statistical analysis: Was the annual HMDA data analyzed for potential disparities on a prohibited class basis in marketing (# of originations), underwriting (denial rate), pricing (APRs/note rate) or other aspects of credit transactions (i.e. withdrawn applications)? Were the results reviewed and responded to appropriately? Did the credit union provide for an analysis of consumer loan data? This could include denial or origination rates based on factors recorded on the core system such as age.
Internal Audit Fieldwork Step 4. Perform interviews and walkthroughs: Interview employees regarding loan application processing. Consider selecting branch managers, universal agents, member service representatives, call center personnel, loan officers, and lending management. Develop a questionnaire to be used and consider including questions regarding whether marital/familial status is discussed, process if applicant discloses bad credit or no income before pulling credit report, and process for approving an exception to lending guidelines. Interview compliance and marketing personnel and assess whether Fair Lending is taken into consideration when selecting images for advertisements including the website.
Internal Audit Fieldwork Step 5. Documentation Testing: From system generated reports, select a sample of pending, incomplete, withdrawn, and denied loans. Include applications/loans that are off-system (i.e. credit card, mortgage, business). Review files for compliance with procedures and determine if Notices of Action Taken were timely sent. Trace a sample of mortgage applications to the most recent HMDA-LAR and verify attributes were properly completed. Verify the HMDA-LAR was properly completed and timely submitted.
Internal Audit Fieldwork Step 6. Additional Considerations: Evaluate the training program for new hires and existing employees. Departments such as Marketing and Business Lending are often not included in the training schedule. Evaluate the quality control process over lending. Determine if a sample of denied loans including mortgage, consumer, credit card, and business loans are subject to a secondary review. Evaluate advertisements for loans including the website to see if certain applicants may be discouraged from applying.
Internal Audit Fieldwork Step 6. Additional Considerations (continued): Review sample of consumer complaints alleging discrimination and verify system is in place to track and address complaints timely. Verify record retention requirements are met for denials, complaints, HMDA-LAR. Verify appropriate signage is displayed (i.e. FFIEC disclosure statement made available, Equal Housing Lender Logo). If previously subjected to Fair Lending exam or internal audit, verify all observations were appropriately responded to and corrected.
Audit Program, Testing Worksheets and Supporting Documents Audit Program and Testing Worksheets should be sufficiently detailed to support the internal auditor s conclusions regarding the Credit Union s level of compliance with Fair Lending requirements. Consider including: An initial survey and detailed fieldwork steps that reference supporting documentation and allow for notes to be entered in the Audit Program. Excel spreadsheet identifying any files tested and attributes reviewed. Copies of any questionnaires utilized and listing of interviewees and notes. Any items reviewed and relied on to support completion of audit procedure.
Communicating Results The Internal Auditor should meet with management responsible for Fair Lending compliance and discuss all potential findings at the conclusion of fieldwork. During the course of fieldwork, significant issues should be brought to the appropriate parties attention, if necessary. Formal written report including objective, scope/procedures, and results should be prepared and disseminated to the appropriate parties for review and response.
Open Forum
Thank You! Kristie Kenney Hoover, NCCO Internal Audit Manager kkenney@doeren.com 305.432.1426