Four steps to take now to prepare for CFPB Small Business Fair Lending Reviews
Four Steps to Take Now to Prepare for CFPB Small Business Fair Lending Reviews
CFPB is currently scheduling Small Business Fair Lending Reviews at financial institutions of all sizes, with a strong focus on pandemic lending practices. We explore what to expect and how to prepare.
Small businesses are the lifeblood of local economies and communities across the US—and fair and equitable access to credit is critical to sustain these businesses. Even prior to the pandemic, the Consumer Financial Protection Bureau (CFPB) began to focus on small business lending and servicing activities at some of the country’s largest banks. Then came COVID-19. Small businesses across the country were severely impacted by the pandemic—many were temporarily shut down while others permanently closed.
The Pandemic Fallout
The Paycheck Protection Program (PPP) and the CARES Act provided financial relief through funding and forbearance programs; however, regulators are now working to ensure that small business were treated fairly by creditors during the pandemic and that these relief programs were provided in a non-discriminatory manner. In other words, Small Business Fair Lending has become a priority for CFPB.
Small Business Fair Lending Reviews
CFPB is currently scheduling numerous Small Business Fair Lending Reviews at large banks—building on the pre-pandemic work that had already begun—as well as with many other financial institutions, including community and midsize banks. PPP is clearly under the microscope in these reviews, especially regarding disparities in how customers were treated and any barriers to protected classes. Yet despite this focus, formally defined guidance and processes are not yet available to the examiners or the industry. As a result, these reviews are currently a work in progress—they are learning as they go.
What can you expect from Small Business Fair Lending Reviews:
- Three to six months in advance of the exam, the CFPB will request data on small business lending, including originations, credit cards, mortgages, etc.
- Data will be used by CFPB economists to select focal points for the examiners to review
- Examiners will conduct comparative file analysis using what the economists provide them
- Examiners will focus on pricing and underwriting—any discretion in underwriting and pricing and how are exceptions were documented
- Examiners will use proxies like geographic location and surnames
- If modeling is used, they will look closely at models and validations
- Most of the egregious issues have been related to policy, not documenting exceptions
- They will take a close look at the geographic dispersion of loan activity
Preparation is key when it comes to CFPB Small Business Fair Lending Reviews
Here are four steps to take now:
- Conduct a small business fair lending risk assessment that considers the types of loans offered, the geographic distribution of loans, loan underwriting and pricing processes and loan servicing
- Conduct loan underwriting and pricing fair lending analysis using proxies such as names and surnames for race, sex and ethnicity
- Remediate any identified issues and report the results to the Board and Senior Management asap
- Review small business policies and procedures to ensure that fair lending risks are adequately addressed including:
- Processes for taking and evaluating small business loan applications including what credit data is required and how it is considered
- Clear and consistent underwriting and pricing standards
- Limits to and circumstances under which underwriting and pricing exceptions are allowed
- A requirement to document underwriting and pricing exceptions
- Use of models and validation requirements
- How exceptions are reported
- Monitoring processes
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