With more than 1,200 people attending its Mega Conference in Indianapolis last month, the Indiana Bankers Association set a record for attendance. Offering at least five different session topics to choose from each day, there was plenty of information for everyone in the bank. In a session on fair lending risk assessments, Carl Pry, senior director at Treliant Risk Advisors, said the number one question he gets asked by bankers is, “What does it have to look like?”
Pry told attendees that there is no fair lending template to use in an assessment. It does, however, need to have certain elements. One element is a quantification of risk in the form of a rating. Pry prefers a scale of one to five as opposed to a low-moderate-high rating. In a low-moderate-high scale, everything tends to get rated moderate because not everything can be low and high is “scary.”
Another element regulators want to see in a bank’s risk assessment is how well the bank identifies, measures, controls and monitors fair lending risk. When identifying and measuring the quantity of fair lending risk, look at inherent and residual risk, Pry said. Inherent is risk absent any controls while residual is taking your controls (i.e., the processes in place to mitigate risk) into account.
Control is the single biggest weakness in banks, according to Pry. He suggested the bank list its controls in the assessment. He also said to be sure to include all loan products and delivery channels in the assessment, using Home Mortgage Disclosure Act data as the starting point. In addition, banks should include their data integrity efforts in the assessment so the regulators know they are looking at valid data, in Pry’s opinion.
Statistical analysis also needs to be included in the assessment. Pry said to focus on underwriting and pricing. “Do you have a bankruptcy indicator?” Pry asked attendees. “How do you differentiate loan types?”
Other things to consider, Pry said, include risk indicators. “Check your credit policies,” he said. “Do you still require cosigners for unmarried applicants?” That could be considered discrimination, according to Pry.
Also, identify focal points — if it was a problem in the last exam that will be the first thing the examiners look at during the next exam. Similarly, identify and address any new problems in the loan portfolio before the regulators get there.
Having a process in place to deal with complaints is also important, according to Pry. He asked session attendees if there is a mechanism in place to flag complaints — especially if it has a fair lending side to it. “The expectation from regulators is that you know what everyone is saying about the bank,” Pry said. Otherwise, those complaints could be the foundation for unfair, deceptive and abusive acts and practices, commonly referred to as UDAAP, issues.
UDAAP also played a role in a session on marketing by Becki Drahota, president of Mills Financial Marketing. Drahota said banks need to be careful with their marketing to avoid being victims of UDAAP. For example, Drahota said you may not be able to say “rates as low as” because that could be considered deceptive. She suggested, instead, banks make the regulators a part of the marketing process. “Ask them ‘Here’s what we want to do. Do you see anything wrong with it?’”
Drahota also presented some odd marketing truths about the industry. One is that the majority of banks’ revenue comes from small businesses, yet the majority of banks spend their marketing budgets on retail banking. Another truth: a lot of banks brand themselves as the “friendly bank” but friendliness is expected from customers. It is not a differentiator and will not make people remember your bank over a competitor.
Another interesting fact: The percentage of owners of certificates of deposits has fallen from 19 percent to 10 percent in the last couple of years, according to Drahota. “Where is that money going?” she asked. “If money is not swelling in another area of the bank then it is going out the door.”
Kari English is senior editor of BankNews.
Copyright (c) June 2012 by BankNews Media