Episode 4: Fairness in the face of crisis: Fair and responsible banking in the midst of chaos
Greg Corombos, News Director at Radio America 00:06
Hi, I'm Greg Corombos and thank you for joining us. The COVID-19 pandemic refuses to go away. The prolonged disruption presents multiple challenges to lenders. Today, we will discuss why keeping a focus on fairness and fair lending has been difficult and how to address it effectively. Here to lead today's discussion on fairness is Wolters Kluwer’s Vice President of Banking Compliance Solutions, Samir Agarwal, and he is joined today by Britt Faircloth, a Managing Consultant with Wolters Kluwer's Consulting Services team, to provide strategies for keeping fairness front and center.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 00:42
Thanks, Greg. We're living in a historical moment. That's for sure. It's hard to believe that today's lessons learned were just from experiences a day ago. This pandemic has been creating a broad group of vulnerable people and protective regulatory reform. Our banking compliance officers are operating with remote workforces, disrupted client contact, and quickly assembled regulatory programs. While all this is going on, they are trying to grasp what the eventual regulatory scrutiny will be. It's an unknown. I've asked one of my colleagues, Britt Faircloth, to join me today. She's a Consulting Manager with Wolters Kluwer Advisory Services, and we're going to talk about the pandemic-driven challenges that banking compliance officers are facing today. Specifically, we're going to focus in on strategies for keeping fairness central to your organizations and the product lifecycle. Britt, welcome. Tell us a little bit about the consulting work that you do with Wolters Kluwer?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 01:38
Hi, Samir. Thanks for having me. In general, our work in Advisory Services covers a pretty broad range of regulatory compliance needs for any size institution. This can include things like CMS reviews, risk assessments, HMDA or CRA data integrity reviews, and then, of course, my personal focus area and favorite, which is fair and responsible banking, data analytics.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 02:03
What kinds of shifts have you seen in the areas of focus among compliance officers during the pandemic?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 02:10
We're definitely seeing a shift, and it's really not a surprise given the current environment. Globally, we have more vulnerable populations than we ever have before. Here in the U.S., just consider that a CFPB survey in 2019, which would have been before the pandemic, indicated that 52 percent of U.S. households responded that they would not be able to cover expenses for more than two months if they were to lose their main source of income.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 02:41
That's an interesting statistic. It's really about how it hits home for households across the states. What attention do banks need to put on fairness now?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 02:52
If you think about that, before the pandemic over half of those respondents would have been unable to cover two months of expenses. Now, we've been operating under stay at home orders or some level of phased reopening for about four months now in many areas with really no end date in sight at this point. The increase in vulnerable populations is driving more focus on consumer protection and more focus on fairness. For us at Advisory Services, it's caused our clients to ask us to shift our focus to areas that may have been a lower priority before the pandemic. Things like the review of servicing functions, or for us to look at new programs, such as lending under the Paycheck Protection Program by the SBA.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 03:44
How are the programs actually holding up? Can you use the general program and adapt it slightly, or are we talking about a new level of fair banking operations that needs to be installed in all the institutions?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 03:57
I think that the program is strained so banks have usually operated under pretty robust business continuity plans, and many of those have really been tested in the current environment. Those plans were really developed with things like natural disasters in mind, and certainly, natural disasters are a strain for all of us. But they're different, right? They're more localized, and they have less downtime. They may only impact a certain segment of your offices or branches if you're an institution. Few plans would really have been able to cover the scope of something like this pandemic, which we now know is truly global and long-lasting. Many plans originally considered fair lending compliance as something that could be pushed to the side for a bit. It was something that maybe your testing and your monitoring could have been done when people were back in the office or in some sort of recovery phase. Now, I think institutions might have a large population of their back-office employees, like their compliance departments, working remotely more long term and that's going to create some added risks that have to be mitigated.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 05:11
Are there known areas that might be more vulnerable or challenging than others?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 05:17
Yes. Certainly the entire process is probably operating differently in a lot of institutions if they had to deploy a remote workforce really rapidly, which a lot had to do. A few hot spots that we've been seeing coming out are in the areas of marketing, and of course, servicing. For marketing, I know that sounds like a strange one. But while institutions may not be marketing or advertising new credit products as much as they were, many are doing everything they can to let customers know that help is available. Where this marketing and outreach process is decentralized now with remote working, there can be challenges in ensuring that all those customer segments receive the appropriate messaging and that no populations are really left out or excluded.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 06:08
There would have been quality control tactics in place, right? You're talking about items, such as call monitoring, and that becomes harder to do when we have a remote workforce.
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 06:18
Yes. Call monitoring, or maybe even just understanding how everyone is reaching out. These things may have been centralized in the past with compliance and marketing really working closely together to understand where every email went out and to make sure that it was approved, or where every mailing went out and to make sure that was an approved process. Here, I think some of the concern comes in that different regions, or maybe even different branches, may have management that are reaching out to their local customers to offer assistance, which is something that is greatly needed. But if those individual offices are not reaching out to their customers in the same way, and with the same depth of service, that's when you can start to really see a difference in the way that people are serviced and treated.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 07:12
When we talk about fairness, in the example you just gave us, is there a localized geography discrimination that's also looked at, or are we considering that each branch knows their geography and they have to send the same message to even the local communities?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 07:31
What I would hope to see is that they're able to send consistent messaging across the board. What I wouldn't want to see is institutions that are in higher income or lower minority areas may be reaching out more and with more effort to grant assistance to borrowers. Perhaps some of the branches and maybe lower-income areas or more minority areas haven't received the same messaging from a corporate level and aren't doing the same thing. That's when you can start to see really where loan mods or some payment offerings might become different across the board in different neighborhoods, which could really drive increased risk.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 08:19
Can you give some other examples where servicing or other types of pressures are going to be put on the bank balance sheet if we don't pay attention to fairness and lending?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 08:31
I don't know as much about what the impact will be to everyone's balance sheet long term. I certainly think there will probably be a negative impact. But we've definitely seen the government try to be responsive with legislation, and we've seen provisions under the CARES Act that allow quite a lengthy period of forbearance on mortgage payments, for example. That is going to be critical for institutions to make sure that, as they're receiving this influx of requests, to defer payments. And maybe for other types of assistance, to increase a credit line for a borrower who's really struggling or to defer payments on another type of credit. That institutions are sure that they can really, consistently service all of those requests, and that may mean that they have to increase training if they're going to beef up staffing in the midst of this. Maybe they're going to temporarily reassign people from other duties and have them help out with some of these requests. It's going to be critical that everyone is operating on the same policies and procedures and is able to access them and treat all of those requests in the same consistent and fair manner. That can really be a challenge when things are decentralized. If we just think about whether or not everyone's able to access the most recent version of all of these policies and procedures remotely. What about second reviews on requests? Right? Generally, institutions will have a second review process for denied requests. Well, do you only have one person that was doing that second review process? Do they have any backup? Do you have someone else that you can train to do that? It's very easy for some of these things to slip through the cracks when things become decentralized.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 10:28
Britt, you were talking about resource strain and how we run our programs. If I took a resource that originally did one type of job and then said, "Hey, wait, you still have to do all these other things," how would job aids or any other best practice that you may have to advise our clients or listeners on help and are they effective?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 10:50
I'm a huge fan of job aids. I love them, especially if they have screenshots. You can put together these really great documents that can direct a person on how to do a task start to finish. Job aids are great, but they only are great when assuming that everyone can access them, everyone uses them and that you're able to set them up in a manner that provides consistent guidance. That means that the background activity or situation that's causing this action has to be uniform, and that just may not be the case in the environment we're in right now. Right? Not everyone's request for assistance may be the same. So, you still run a risk of having people that follow your job aid very well but maybe it's just the wrong situation, and they don't have enough context or enough background experience to really understand nuances or differences like that. But where you can, I think it's a great thing to provide very detailed job aids and procedural documents, and it's critical to make sure that everyone who needs them can access them. Things like making sure that your remote workforce can access your intranet if that's where everything is housed, or if you need to send these out via email blasts. Whatever the case may be, everyone needs to be able to have access to the most current and up-to-date information. Because, as we've seen, things change. Regulators issue updated guidance or the rules may change somewhere along the way, and so this is not generally a one and done. You may be updating these job aids and policies and procedures. You have to make sure that everyone is using the latest and greatest version, otherwise they will be treating people differently.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 12:49
How does it pertain to customers now that there is no brick and mortar branch to come into immediately? Are they still able to transact and upload documents? Or has the technology been used in terms of fairness and the ability to serve the clients as we once did?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 13:06
One thing that the industry has going for it is that there had already been a pretty large shift to remote banking and online banking by a very large population. Many of us, just even speaking for myself, I can't tell you the last time I went to a branch location. I do everything from my mobile phone or from my web browser. So, that was probably something that has helped this transition a bit. But there may be things that people used to make those rare trips into a branch for that they're not able to anymore if you have branches that are closed. Some of the things that we're seeing are that you may have certain segments of your customer base that don't have the ability to upload certain documentation. People who might have had access to scan and upload documents to you at work but aren't working right now may have lost that functionality, or people just may not be familiar and may need some help to get those tasks completed. You may see an uptick in calls to your customer service line with people who just don't understand how to do things. Then the added risk to that is once you get it if you're receiving some of these documents and information, how are you retaining it, right? It may be very easy to retain a document that's attached to an email that you can print to PDF or keep in your imaging system. But what about if you set up functionality via text or via some other mechanism in your online banking tool? You have to really make sure that you understand the different sorts of methods by which you may be getting documentation and information, and then what is your method for retaining that information for each of those different methods because it may be different.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 15:00
Let's talk about the CARES Act and the Paycheck Protection Program. How is fairness playing a role in that Act being passed?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 15:08
As we've seen in the news, there have been some legal challenges raised to the PPP and whether or not it was implemented fairly. Largely, I think these include allegations or concerns relating to something called gating, which would be the concept that there was a requirement that an applicant had to have some sort of depository or lending relationship with the institution in order to apply for a PPP loan. So, that's one piece. The other allegations relate to something that we call shuffling, which was that institutions may have reordered applications and took those with the highest loan amounts first in order to increase fee income under the PPP. So, what that leads to is some concerns that there may not have been an equitable distribution of PPP funds in minority areas, or to women or minority-owned businesses. It's really crucial that institutions understand where PPP funds were distributed, and more specifically, where they weren't. This could be accomplished by putting those PPP loans on a map with census tracts shaded for income level or for minority concentration. If you take a visual, like a map, and pair that with a comparison of the PPP lending to area business demographics, institutions can get a really good understanding of whether their PPP lending is adding to their fair lending risk.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 16:43
What does that mean that we have to plan for?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 16:45
I think we have to plan for a lot, unfortunately. The next big challenge is likely to be more in the servicing space. Currently, given the economic impact of the pandemic, and with all of the provisions under the CARES Act, forbearance requests have been coming in at a pretty high pace. People need the help, and it's really easy to do in many cases. A number of institutions even allow the request to be made online and the payments are just deferred at that point.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 17:14
Yes. I have seen that. It's almost as easy as three clicks and you don't have to really provide as much reasonings, per se, on why you're asking for forbearance. But then what happens to that individual's loan or what happens to that institution that's requesting the forbearance?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 17:32
What it comes down to is what happens for you as a borrower when you have a big payment due six months from now, or potentially longer than that, right? It could be a year from now if you're granted an extension on the forbearance period. So, the workout requests are going to come next and that's going to try to bring borrowers current and to keep them in their home, hopefully. What that means is, it's likely that later this year and into 2021, we could be looking at a big loan modification crisis, and increased volume for lenders can carry regulatory risks if institutions aren't careful to make sure that they have an appropriate resource and controls in place to manage the influx of all those requests.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 18:18
We talked a little bit about the consulting work that you do. Can you highlight any specific offerings that might help institutions navigate and stay vigilant with the fair lending programs?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 18:28
For our smaller community banks, we generally recommend that there's some sort of fair lending performance baseline analysis. This offering would assist institutions with understanding what their lending data can tell them about their denial rates, pricing, rates of application, origination, and their potential for disparate treatment.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 18:50
So, it's like a quick diagnostic. How about larger institutions?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 18:54
Yes, definitely. For larger institutions, we actually have a very broad range of services that cover qualitative and quantitative analyses. That would include everything from fair lending risk reviews, fair lending risk assessments, compliance management system reviews. We do a lot of redlining analysis for clients, and that goes all the way to even doing data integrity reviews of HMDA or small business lending data that institutions may need to use for their own fairness analysis.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 19:24
It makes a lot of sense. Obviously, the bigger you are, the more regulated you are and so you’ve got to be more aware. In addition to the consulting services that your team provides, are there tools that you recommend or any other best practices that will help our listeners strengthen their fair lending programs?
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 19:39
Yes. Fair Lending Wiz is our fair lending software tool that assists institutions with understanding and really managing their levels of fair lending risk. In addition to that, I would say our experts regularly speak at a number of events and on webinars and things virtually now, of course, more so than ever. We really help provide strategies for remaining compliant with the fairness expectations. Also, we host an annual conference, which is called the CRA and Fair Lending Colloquium, that will also be virtual this year. Institutions can find details at www.CRAColloquium.com.
Samir Agarwal, Vice President, Banking Compliance Solutions, Wolters Kluwer 20:19
Britt, it was a pleasure to speak with you today. I think we've learned a great deal of information when it comes to maintaining, administering, and operating our fairness programs in each of our institutions. I'm sure that each of our lenders and listeners are going to take away some valuable lessons and tactics to implement a better and more fair practice at our institutions.
Britt Faircloth, Consulting Manager, Wolters Kluwer U.S. Advisory Services 20:42
Thank you. I sure hope so.
Greg Corombos, News Director at Radio America 20:44
That's Wolters Kluwer’s Vice President of Banking Compliance Solutions, Samir Agarwal, joined by Britt Faircloth, a Managing Consultant with Wolters Kluwer Advisory Services team. Wolters Kluwer is the host of this podcast. Wolters Kluwer is a market-leading provider of advisory services and technology solutions for optimizing fair lending compliance programs. For more information and additional guidance, please visit WoltersKluwer.com or call 1-800-397-2341 and then press the number one. Please join us for future podcasts focused on navigating regulatory compliance.