By: Deniz Johnson, COO, Stratyfy & Brad Blower, Founder and Principal, Inclusive-Partners LLC
In this period of political and financial turmoil, senior financial services leaders agree that now is not the time to pivot away from treating people fairly. Across the financial market, banks, fintechs and Government Sponsored Enterprises (GSEs) must still follow and comply with fair lending laws. The foundational rules of the road have not changed. Although we are likely to see less public enforcement actions, the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA), along with related regulations remain in place. Nor have the national demographics changed because we have a new administration. We live in a diverse society that values homeownership and entrepreneurship. Private capital offered and distributed fairly is the key to ensuring the housing and small business markets thrive.
Why Fairness is a Good Business Decision
The federal government’s recent actions targeting diversity, equity and inclusion have understandably led to confusion and pauses in sectors that rely on federal funding. By contrast, successful private lenders know that they are in this for the long haul and keeping your foot on the gas and staying the course is the only way forward.
For example, advancing the fair and accurate use of artificial intelligence by monitoring models for disparate impact as part of robust compliance management is, and continues to be, a good business practice. There are cost-effective methods for not just the largest financial institutions, but also regional banks, community development financial institutions (CDFIs) and community banks to use technology to identify credit-worthy borrowers. These borrowers are in all demographic groups and located in urban, suburban and rural communities.
To be able to support economic growth and stability we need to have full participation of communities across the financial market. Something we can all agree on is that the consumer protection and civil rights laws were created to ensure that anyone can have access to financial services and products in a safe and sound way.
How Regulation is Shaping Compliance Management
Pumping the brakes on compliance will only subject financial institutions to look-back enforcement and supervisory actions in the future. The Biden administration brought sixteen cases against mortgage lenders for their failure to comply with fair lending laws during the preceding administration. These redlining cases brought in more than $153 million in relief for past discrimination by lenders who either were recklessly indifferent to the needs of the communities where they did business or did not build out compliance management systems (CMS) that warned them that their practices were discriminatory.
There is also real-time risk because state attorneys general and non-profit civil rights and consumer protection groups are already ramping up to fill the federal enforcement vacuum. Further, the supervisory arm of the federal agencies that regulate financial institutions will still be wielding their soft power through the exam process. That power will be less predictable now, but a financial institution downgrading its compliance practices will only put a target on its back with its federal and state regulators.
Why Successful Financial Institutions are Sticking to their Playbooks
So where does this leave the bulk of the financial services industry that wants to succeed during these tumultuous times? They should continue to build out and enhance their financial offerings and analysis that allows them to provide services and products fairly. These good business practices include working with partners who have the skills and technology to monitor for fair lending compliance and look for less discriminatory alternatives (LDAs) when using artificial intelligence including models. They also support providing down payment assistance for first-time or first-generation homebuyers and providing an easy path for home counseling for homeowners and technical assistance for small businesses as part of the financial package offered.
Savvy financial institutions should also look past some of the headlines of the day and maintain a more nuanced view of the regulatory landscape. Although the federal government may take actions that tear up some of the rails of compliance through executive orders and drop or even reverse enforcement and regulatory efforts, federal and state courts are bound by existing laws. And supervisory personnel will still expect financial institutions to have safe and sound practices, including monitoring for discrimination.
So even though the currently sidelined Consumer Financial Protection Bureau (CFPB) may decide to return civil monetary penalties to a discriminatory mortgage lender and its owner (Townstone Financial), discouraging a consumer in a protected class from applying for a loan is still discrimination covered by ECOA. Despite the Community Reinvestment Act (CRA) regulators announcing their intent to rescind the CRA Rule of 2023, a financial institution must still analyze the needs of the community where it does business and offer safe, sound and fair products to the members of that community. And even after the Federal Housing Finance Agency (FHFA) restricts the GSEs ability while in conservatorship to maintain their own Special Purpose Credit Programs (SPCP), successful mortgage lenders will continue to develop SPCPs to expand their client base for long-term viability and enhanced compliance.
It is all about keeping your eyes on the road and looking out for well-established guardrails. Proactively steering your financial institution on a route forward that will serve your shareholders and customers over the long-term is the safest and soundest way to succeed. Looking for short-cuts and expedient alternative routes will only lead to unnecessary risk.
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