Hand sanitizer? Check.
Management of fair credit risks through COVID-19? Did you control
The COVID-19 pandemic had a disproportionate impact on certain protection classes in the United States, particularly minorities. Non-white populations have seen higher hospitalization rates, more deaths, and higher unemployment rates over the past six months compared to their non-minority counterparts. These and other inequalities caused by pandemics are based on a long history of inequality in health, wealth and education for minorities. The synergistic effects of these two trendlines have the potential to further widen the economic divide and enable minority communities to have less access to credit and potentially less favorable terms when those credits are extended. In addition, minority consumers may have a greater need for credit services when they reach out to customer service staff and seek solutions to resolve temporary or permanent difficulties.
Financial institutions face their own very real struggles as they attempt to mitigate the myriad effects of COVID-19. Banks report a deterioration in their expected capital positions, an uncertain economic appearance and a reduced risk tolerance – classic security and solidity concerns. Accordingly, it is not surprising that many financial institutions are tightening consumer credit standards and taking other steps to mitigate credit risk. At the same time, they are juggling the tremendous pressures associated with servicing existing credit in these unprecedented times, including the rise in the sheer number of consumers in need of assistance.
Legal and compliance experts are asked to identify and address current and emerging risks in a one-off crisis. Fair lending and fair service risks should be the focus of this analysis. While regulators and the CFPB have indicated that their oversight will take into account the national emergency during this period, we can assume that the flexibility extends only to those institutions that make good faith efforts to ensure fair lending and others Comply with consumer protection laws.
Brush up on fair lending
In the context of the creation and provision of financial services, two theories of unlawful discrimination have prevailed: different treatment and different effects:
- Differential treatment is willful discrimination and is determined by either (i) an overt discriminatory act or (ii) comparative analysis showing different outcomes for protected class members compared to their non-minority
- Disparate effects, on the other hand, are unintentional discrimination that occurs when a face-neutral policy directly has a disproportionately negative impact on members of one or more protected classes. Such a policy can be challenged unless the institution can demonstrate that it is a business need and no other policy exists that could address that need with a less discriminatory effect 
While a strong fair lending and service program controls discrimination under both theories, in the COVID-19 era it has become especially important to focus on different impacts on minority consumers or even approaches that are viewed as proxy for different treatment could become. Controls over these issues are discussed below in the context of each pillar of an effective fair lending and fair service compliance management system (“CMS”).
Supervision of the board and management
The board of directors and the management of an institute are ultimately responsible for fair lending and compliance with fair services (hereinafter collectively referred to as “fair lending”). Setting an appropriate tone from above can ensure that the leadership’s focus on the associated risk management is communicated and shared with all relevant employees. The board of directors and management should also be attuned to the rising fair lending trends with COVID-19, especially when minority borrowers may need additional assistance. It may now be time to improve existing reporting to ensure that these trends, as well as the results and insights of ongoing risk assessments, tests and monitoring for fair lending, are regularly made available to senior management and the Board of Directors or appropriate sub-committees from that.
The board of directors and management set expectations regarding the prioritization of compliance with fair lending. However, the day-to-day compliance management function is usually carried out through the four components of an institution’s compliance program:
- Policies and Procedures. Changes to policies and procedures need to be reviewed quickly in this fast-moving environment, but it is equally important that they are thoroughly analyzed. For example, in view of the tightening of credit standards, are we using overlays that affect minorities differently or that could be seen as proxies for different treatment? In addition, some of the most critical issues that need to be addressed in connection with existing or new policies and procedures include areas where discretion can affect. For example, many institutes have a large number of service calls due to COVID. 19 financial implications. Do customer service representatives have the discretion to waive late fees or offer or recommend one mitigation option over another? If so, check that applicable policies and procedures adequately define the parameters so that this discretion does not have different effects on minority borrowers.
- Training and staff. In times of crisis, the employees with customer contact are often fully employed to meet urgent customer needs. This can result in training and staff taking a back seat. During the pandemic, keeping up with fair lending training should be a priority, even if there is a feeling that there is no time to ensure staff understand and how to deal with the fair credit risk that is evolving. Likewise, an ongoing assessment of the adequacy of your facility’s staff and resources can help prepare for and cope with a sudden influx of consumers in need of assistance without losing focus on fair credit commitments.
- Testing, monitoring and checking. A timely assessment of the potential fair credit risk can help an institution correct course before there is a pattern or practice of potentially discriminatory activity. For this reason, institutes should check whether additional or more frequent tests and monitoring make sense in the COVID-19 era and for which business areas. For example, if new underwriting policies have been implemented, should the populations that are approved and rejected be investigated faster? What about the terms on which the loan is extended? Call records can also be a useful throwback to identify consumer interactions that may result in different treatment in the credit or service context.
- Complaint management. Complaint data is often one of the most useful pieces of information for identifying emerging compliance trends within an institution. However, their usefulness depends on the availability and quality of the complaint management functions, including tracking, categorization, root cause analysis, and management authority to take action based on the results. As COVID-19 continues to cause problems for consumers, you should pay special attention to complaints about harm reduction programs, especially those that are not intended to be discretionary, such as CARES Act Section 4022
Service provider oversight
The supervisory authorities have made it clear that an institute can be held liable for compliance violations by its providers. As COVID-19 continues to cause upheaval, institutions may need to deploy providers more frequently than usual to reduce staffing levels, perform outage and / or REO management, and perform other tasks at significant risk for fair lending and service. Consider whether the current level of surveillance is appropriate given the pandemic environment and what action the institution will take if a significant risk or breach is identified.
 Centers for Disease Control and Prevention, “Considerations for Health Equality and Racial and Ethnic Minority Groups” (July 24, 2020), available at https://www.cdc.gov/coronavirus/2019-ncov/community/health -equity / race-ethnicity.html.
 Board of Governors of the Federal Reserve Systems, Senior Loan Officer Survey on Bank Credit Practices (July 2020), available at https://www.federalreserve.gov/data/sloos/sloos-202007.htm.
 See e.g. B. FFIEC Interagency Fair Lending Examination Procedures, iii-iv (August 2009), available at ffiec.gov/PDF/fairlend.pdf.