By Benjamin P. Saul, Amanda M. Raines and Ann D. Wiles, of BuckleySandler in Washington, D.C.,
In response to heightened regulatory and enforcement scrutiny of non-mortgage consumer credit, this Emerging Issues Analysis addresses important considerations for conducting fair and responsible banking risk assessments for non-mortgage lines of business. Although experience from mortgage risk assessments provides a useful framework, non-mortgage lines of business present special considerations, both in terms of substance and execution.
What is a Fair and Responsible Banking Risk Assessment?
A fair and responsible banking risk assessment is a process designed to provide a financial institution with an understanding of its fair and responsible banking risk, how well it manages that risk, and the likelihood that it is complying with fair and responsible banking laws and regulations. Fair lending risk is the likelihood that a financial institution's lending operations may be found to treat or impact applicants and borrowers differently on a prohibited basis. It includes the potential for a finding of noncompliance with the technical requirements of certain laws and regulations, such as ECOA and Regulation B, along with discrimination and discouragement in the lending process. Fair lending risk potentially encompasses all of a financial institution's lending products - mortgage, consumer, credit card, and commercial - and all its credit-related lending activities from application to closing. Fair banking expands on the concepts of fair lending risk and encompasses the entire loan life cycle, including post-closing activities such as collections and servicing, and pre-application activities such as marketing and loan solicitation and origination.
Responsible banking goes beyond principles of non-discriminatory lending to examine other potentially unfair, deceptive, or abusive acts and practices ("UDAAP") by lenders. Although the precise contours of these acts and practices will be determined in part through enforcement and litigation matters, according to the CFPB Examination Manual, unfair acts or practices are those (i) that cause or are likely to cause substantial injury to consumers; (ii) in which the injuries are not reasonably avoidable by the consumers; and (iii) the injuries are not outweighed by countervailing benefits to consumers or to competition. The CFPB, moreover, has defined a deceptive representation, omission, act or practice as one that (i) misleads or is likely to mislead the consumer; (ii) the consumer's interpretation of the representation, omission, act or practice is reasonable under the circumstances; and (iii) the misleading representation, omission, act or practice is material. Finally, the CFPB defines abusive acts or practices as those that (i) materially interfere with the ability of a consumer to understand a term or condition of a consumer financial product or service or (ii) take unreasonable advantage of (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (b) the inability of the consumer to protect his or her interests in selecting or using a consumer financial product or service; or (c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
An Increasing Focus on Non-Mortgage Business Lines
Non-mortgage fair and responsible banking risk assessments have become increasingly relevant. As an initial matter, fair "lending" examinations have both intensified and evolved from traditional areas of regulatory focus, such as judgmental underwriting and discretionary pricing, to include all aspects of the credit life cycle-i.e., servicing and collections. As examinations have intensified generally, so too has the intensity with which examiners now analyze issues related to non-mortgage credit. Adverse findings and concomitant downgrades in compliance and management ratings have been the twin results of broader, more intense compliance examinations.
In addition to increased scrutiny of the full credit life cycle, regulators are scrutinizing an expanded range of consumer credit offerings. For example, credit cards have become an area of significant regulatory attention. The CFPB, in particular, has focused on credit cards, already issuing a report on its collection of credit card complaint data and unveiling an online database tracking credit card complaints. Indeed, the CFPB's Consumer Response Office complaint system began with a singular focus on credit cards "because of [their] wide use, and because credit card problems have been historically among the highest kinds of consumer grievances," virtually assuring the Bureau's continued focus in this area.
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