Part Two. How does the Equal Credit Opportunity Act affect your business?
In Part Two of this series, we discussed the basics of the Equal Credit Opportunity Act, covering disparate treatment, disparate impact and the law's general anti-discrimination goals. Now, we'll discuss what your business can do to ensure you abide by the law.
Consider establishing a self-testing procedure
The Consumer Financial Protection Bureau recommended that lenders design and use an assessment program that tests their ECOA compliance. You may be surprised that no government agency can legally access your test's findings when investigating your business: Privileged information (data the government can't force you to provide) includes:
- The test results
- Any data the self-assessment generated
- Any commentary, analyses or conclusions regarding the test results.
Keep in mind that a government agency may not access the details listed above only if you've taken action to correct any discriminatory practices. If you fail to do so, a public examiner may take the results.
"Divide your lending products into different categories before looking for non-compliance risks."
Setting up an ECOA compliance self-assessment
First, begin with an overview of the ECOA's core requirements. Since we've already reviewed them in Part One, we'll move onto the second step: Identifying discrimination risk factors.
The Federal Financial Institutions Examinations Council noted that deducing the possibility of your company inadvertently discriminating against applicants involves referencing examination work papers, institutional records and other information about your loan application process. Overall, highlight recordkeeping issues, previous fair lending problems with your business's products, senior management's involvement and whether your organization has recently updated its compliance training.
From here, you need to assess your loan approval process. While the FFIEC developed the self-assessment for lenders offering mortgage products, you can apply the same tactics to your own. The FFIEC recommended diving your lending products into different categories. For example, if you specialize in consumer loans, you may segment your products into auto loans, personal loans, short-term loans and other such products.
After dividing up your products, you need to take three steps:
- Review lending policies: Map out the loan approval process, gathering loan application forms, internal appraising and pricing guidelines, agent agreements and other documentation.
- Analyze geographic information: Look at loan origination rates across the districts you service. Do some areas have high origination rates but low approval rates? This may be indicative of unintentional discrimination.
- Conduct interviews with personnel: Speak with loan officers, employees and agents to assess their understanding of ECOA laws. If they can't describe, in detail, what they do to remain compliant, than you're at risk of violating ECOA rules.
Once you've completed these actions, you need to set up a risk resolution plan. Overall, the entire self-assessment process may seem overwhelming. If you don't have the time or resources to dedicate to this process, remember that you have the option of outsourcing to a consultant specializing in ECOA compliance.
Procure alternative credit data sources
Where does alternative credit data come into play? Rent, utility and telecom payment data can help you reach credit-invisible people within certain demographic groups. Depending on where you get this information, it may come in reports look much like traditional credit reports. It's a great way to reach minority applicants who may not have a lot of traditional credit data.