The Federal Reserve has highlighted four critical fair lending violations discovered during its examination of state member banks in 2022. These issues were categorized as matters requiring attention or immediate action. The report emphasizes the importance of rigorous risk assessments, comprehensive training programs, accurate income evaluations, and effective monitoring of loan officer discretion to mitigate these risks.

Inadequate Fair Lending Risk Management Practices

One of the most significant concerns identified by the Federal Reserve was the lack of thorough fair lending risk assessments. Financial institutions with higher fair lending risks should implement a specific evaluation process tailored to their unique circumstances. This assessment is crucial for identifying and addressing potential issues that may not be captured by general compliance risk assessments.

Financial institutions must ensure that their risk management programs are proportional to the size, complexity, and risk profile of their lending activities. General compliance risk assessments are often too broad and lack the necessary depth to detect specific fair lending issues. Therefore, institutions need to conduct separate and detailed fair lending risk evaluations to effectively measure and mitigate these risks. Supervisors expect institutions with heightened fair lending risks to have robust systems in place to identify and address any potential problems promptly.

Training, Income Evaluation, and Loan Officer Oversight

The second major issue highlighted was the insufficient provision of fair lending training. Regular and targeted training is vital for ensuring that all staff members understand the importance of fair lending practices. Relying solely on compliance departments can lead to complacency and oversight of the benefits of specialized training programs.

Additionally, the failure to adjust nontaxable income correctly was noted as another significant violation. When lenders analyze gross income but fail to account for nontaxable income appropriately, it can result in unfair treatment of applicants. Banks must establish clear policies and procedures that require underwriters to adjust nontaxable income accurately when assessing loan applications. Lastly, inadequate monitoring of loan officer discretion poses a considerable risk. Institutions can either eliminate discretion entirely or implement strict oversight mechanisms to track how loan officers handle exceptions, ensuring transparency and fairness in lending decisions.