In November 2020, the National Credit Union Administration (NCUA) gave an update on consumer compliance expectations for 2021, along with some insight into its exam focus. NCUA explained that upcoming credit union examinations would focus on, among other things, common fair lending issues, as well as loan accommodations triggered by the COVID-19 pandemic. Additionally, the Biden administration has indicated that fair lending will be among its priorities.
Although pandemic-related loans may be reviewed as a part of regular exams and fair lending exams, the rise in fair lending focus is not pandemic-specific, as it appears the agency has been steadily rising, with NCUA seeming to increase its volume of stand-alone fair lending exams over the past few years.
We have heard from a few credit unions about their experiences with NCUA’s fair lending exams and compared these insights to what NCUA described in its Letter to Federal Credit Unions regarding its fair lending exam program, which was published in 2013. In short, it appears that NCUA has increased its capabilities and readiness to conduct separate on-site (or virtual) fair lending exams in recent years and this trend will likely continue.
NCUA’s letter states “NCUA will use multiple factors to determine whether a federal credit union demonstrates the potential for higher fair lending risk which could lead to a fair lending exam.” These factors are:
- Home Mortgage Disclosure Act (HMDA) Data Outliers: NCUA will review credit unions’ HMDA reports to determine if there is data that falls outside of the usual range for pricing, denial rates, withdrawals and loan terms. A credit union may be selected for a fair lending exam if this data indicates a higher risk of violation;
- Fair Lending Violations: A credit union which has fair lending findings or violations in its regular NCUA exam;
- General Compliance Risks: A credit union with moderate to high-risk ratings in other areas of compliance; and
- Other factors: NCUA indicated that the volume, type and complexity of a credit union’s loan offerings may be a factor. NCUA will also consider the make-up of the community the credit union serves, as well as any fair lending complaints submitted by members.
In the years after the 2013 letter was published, it appeared that the first two factors were heavily relied on in determining which credit unions were selected for a fair lending exam. Credit unions could readily determine whether their HMDA anomalies or exam findings might lead to a separate fair lending exam. However, in hearing from credit unions more recently, it appears that NCUA is considering the last two factors more critically. For example, even if a credit union has few to no anomalies in its HMDA data and no previous fair lending related exam findings, the size and scope of its lending practice may lead NCUA to conduct a fair lending exam. The demographics of a credit union’s market may also be considered, and NCUA will ensure that credit unions with large groups of protected members have practices in place to ensure proper treatment of those members. This may mean that a credit union with a few billion dollars in assets in a diverse market, with a large variety of loan products is more likely to receive fair lending exams as a matter of routine, rather than an exam to address existing issues or cure violations.
Scope of Exam
The scope of an NCUA fair lending exam may depend on the credit union’s operations, the reason for the exam and usually takes at least a few weeks, maybe longer. The scope of these exams may be quite large, including a review of all loan products, all lending policies and procedures including indirect loan programs, advertisements, HMDA data and procedures for testing and reviews of complaints. Details about the appropriate scope of a fair lending exam can be found in the Interagency Fair Lending Examination Procedures, which was published in 2009. The procedures indicate examiners should focus their review on products that were not reviewed in the most recent exam, protected groups that make up a significant portion of the credit union’s membership and products or groups that have been the focus of the credit union’s self-testing. However, this guidance is a bit dated and it is possible examiners may now be focused on more than these items. Due to the amount of documents needed to conduct the review, NCUA has increased its use of technology and automation capabilities to collect data and more quickly flag possible questions for the credit union.
Additionally, NCUA seems to have an increased interest in employee and board fair lending training and may review the training documents and schedules used for ensuring credit union employees are periodically trained on these issues. During a fair lending exam, this review may include evidence of group-specific training for compliance, marketing, front-line staff, loan originators, management and any other group that plays a role in the lending process
Ultimately, a credit union that is scheduled for a fair lending exam may want to communicate with the NCUA examiners to be clear about the scope of the exam and documents and materials needed to keep things running smoothly.
Many credit unions have offered permanent modifications like lowering rates, extending maturity dates, forgiving or cancelling part of a loan and fair lending obligations apply throughout the life of a loan including post-consummation changes. NCUA has also reminded credit unions that there is no one required method of assisting members and it will not review loan accommodations in an effort to penalize credit unions. NCUA will take into account a credit union’s good faith effort to operate in a safe and sound manner while working to assist members and following all consumer protection laws, including fair lending laws.
For members that already have loans with a credit union, its fair lending obligations have not ended. Providing important information about servicing options and encouraging members to apply for them may be an important credit union goal to help members through the pandemic. However, issues like inconsistent knowledge and availability of resources across staff may cause some members to be treated differently or offered fewer modification options. To avoid inconsistency or discrimination risk in loan servicing, credit unions may need to create policies and procedures around providing appropriate information, encouraging all members to take advantage of the options and ensuring all staff are trained adequately, have access to all necessary resources and follow the credit union’s procedures.
Ultimately, NCUA stated examiners will focus, in part, on identifying fair lending issues, correcting deficiencies and ensuring remedies for members, while considering the impact on a credit union’s overall loan portfolio.
Loran Jackson is senior regulatory compliance counsel for NAFCU.