Beyond Fair Lending: Transitioning to Fair and Responsible Banking

In recent years, many institutions have begun expanding their fair lending programs to integrate principles around fair and responsible banking – resulting in holistic programs that are not only more consumer friendly, but also aid in reaching the unbanked, the underbanked and other non-traditional markets. During the ABA’s recent Regulatory Compliance Conference, Elizabeth Snyder, senior director in Spinnaker’s Risk Management and Regulatory Compliance practice, moderated a session with Heather C. Schaefer, vice president and chief compliance officer with First Financial Bank, and Shannon Thomason, senior vice president and chief compliance officer with Central Bank.

For decades, regulators have watched financial institutions with eagle eyes, looking for potential violations of fair lending practices. Since banks and other providers have long offered financial services beyond just loans, it’s surprising that regulators haven’t broadened their focus before now to gauge whether those same organizations are treating consumers fairly across their entire product suites.

Our session focused on what organizations must do as they augment their mission to embrace fair and responsible banking. Many institutions are using their existing fair lending programs as a springboard for developing enterprise fair and responsible banking programs. But is that the right way to start? Let’s dig into several of the issues discussed.

Progression of Supervisory, Board and Management Expectations

For our panelists, the current reporting structure for compliance matters includes reporting to risk committees via two subcommittees: compliance and fair banking. One also reports to the board of directors, while the other maintains separate fair lending and compliance committees – with both reporting to a board subcommittee. Reporting structure is critical for ensuring that all areas are adequately covered, but banks also need to be mindful about minimizing overlapping and duplicative reporting.

Our panelists’ banks opted to move in the direction of expanding to fair banking before the regulators began to focus on it. I found it particularly helpful to know that both organizations include their Community Reinvestment Act (CRA) officer on the committees they work with. One also has a dedicated CRA Committee with four seats for board members – not to mention standing positions for the CEO, CFO, chief credit officer and head of branch banking.

Heather Schaefer noted that, in her organization, the compliance officer is specifically tasked with ensuring that senior executives and board members are aware of industry trends and commentary, highlighting “what is noise, what is guidance, what is proposed, and what is going to be final/required.”

Advancing Assessment Processes Beyond Lending

When it comes to assessing fair banking practices beyond lending, both panelists reported that they have reviewed areas of heightened risk concerning overdraft fees and are closely monitoring complaints. A significant takeaway is that many banks are now performing expanded reviews of marketing plans and growth in new markets. They also are taking deep dives on several deposit products and implementing new and helpful consumer add-ons, such as instant-issue debit cards and allowing customers to turn access on and off as needed or preferred.

Impact on Fair Banking

Thomason discussed fair banking considerations that impacted a recent charter merger that Central Bank is working on. With the executive committee focused on standardizing processes during the transition, her group faces a top priority of assisting with coordination. Her fair banking team has also been tasked with reviewing and communicating enforcement actions and other regulatory communication to ensure everyone is aware of emerging risks.

Schaefer detailed First Financial Bank’s look into its data to see exactly which customers it is serving; which customers it could serve better; and which potential customers are out there and not banking with them, and why. Her bank is currently editing policies and procedures to be more nimble in implementing changes quickly when necessary.

Highest Risk Areas to Address

It came as no surprise that both panelists mentioned overdraft fees as an area of very high risk. With both of their institutions working in the wake of recent mergers, another issue they see hitting the high-risk radar is grandfathered accounts, which come with terms that must be honored by the new organization. Particularly noteworthy are loan servicing and collections, which continue to be among the top areas for enforcement actions.

Schaefer discussed the importance of knowing your audience. Once you’ve identified what your bank needs to do, it’s important to know what your regulators expect – beyond what’s required. We certainly all recognize the written regulatory requirements. But Schaefer’s insights reinforced that every agency has an unspoken (well, sometimes actually spoken) agenda, and banks need to know where their regulator’s focus is.

Developing a Fair Banking Strategy

If you’re looking to transition to a fair and responsible banking strategy, let the experts at Spinnaker Consulting Group help you navigate the process. We can partner with you to assist with the implementation actions you need to take to complete the process.