As a fair lending professional, you know there’s no magical formula for avoiding regulatory risk. In fact, it’s impossible to completely avoid risk, no matter how diligent your financial institution is in searching for and addressing it.
But there are ways to minimize risk and put your institution in a good position with regulators. And one of those ways is by ensuring that you have a strong fair lending program designed to identify and mitigate risk.
If you’re brand new to fair lending (or don’t want to admit that you have no idea what we’re talking about), check out this article for some background on what fair lending is and why it’s important today.
Once you’re ready, read on for a look at what a strong fair lending program looks like, why you want one, how to build one, and where to start today.
What a strong fair lending program looks like
Let’s start with what a strong fair lending program isn’t. It isn’t a policy binder that gets dusted off two weeks before an exam. It isn’t a once-a-year training video that everyone watches while nodding off. And it definitely isn’t one person in compliance who “handles fair lending” while everyone else hopes for the best.
Having a strong fair lending program means being able to answer one simple question: “How do you know?”
How do you know your pricing exceptions aren’t falling unevenly across borrower groups? How do you know your marketing reaches every part of your market? How do you know two loan officers would make the same decision on the same application?
Simply trusting that nobody at your institution is doing anything wrong isn’t a fair lending program, and it certainly won’t hold up with examiners. Examiners want evidence that your institution is lending fairly, and getting that evidence can be a lot more difficult than it sounds.
In practice, strong fair lending programs tend to share these traits:
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Leadership owns it. Your board and senior management should understand fair lending risk, receive regular reporting, and set the bar for the rest of your institution.
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It’s risk-based. Your program should reflect your institution’s actual products, markets, channels, and size. A five-branch community bank and a national mortgage lender shouldn’t have identical programs, but both should be able to explain why theirs looks the way it does.
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It runs on data. Decisions about where to look and what to fix should come from analyzing lending outcomes, not because someone said so.
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It’s documented. Policies, analyses, findings, and corrective actions should be written down and easy to find. When you find something, you should investigate it, fix it, and record what you did.
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It’s continuous. Monitoring should happen throughout the year, not right before your exam.
Why you should build a strong fair lending program
We’re not going to sugarcoat it. Building a strong fair lending program comes with a fair amount of work. But it is definitely worth it, especially when you look at what can happen if your institution doesn’t have a strong program. Here are some of the consequences of a poor fair lending program:
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Regulatory findings and corrective action
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Referral to the Department of Justice (DOJ) or the Department of Housing and Urban Development (HUD)
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Consent order or settlement with the DOJ, HUD, or your regulator, which can include restitution to affected borrowers, mandated changes to lending practices, and years of ongoing oversight
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Civil money penalties (scaled with the severity and duration of the violation)
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Reputational fallout
Check out this article to learn more about each of these consequences.
You may be wondering if any of this still matters now that the CFPB has removed disparate impact from Regulation B.
It does.
Intentional discrimination is still fully enforceable, and that’s exactly what uneven pricing exceptions can look like to an examiner. Many states also have their own fair lending laws that recognize disparate impact, and the rules could change again with the next administration. A strong program protects you either way.
How to build a strong fair lending program
Now it’s time to get practical. Let’s follow a hypothetical institution as it builds a strong fair lending program.
We’ll call this hypothetical institution Last Bank (you know, because there are so many First Banks…). Last Bank has about $900 million in assets, a solid mortgage business, and a compliance officer named Maria who wears roughly six hats, including one that says “fair lending.” Last Bank has never had a fair lending finding, but it’s also never looked closely at its process.
Conduct regular self-assessments
Building a strong fair lending program starts with a self-assessment. Where is your program now, and how has your institution been managing fair lending risk so far? When you review your own lending before an examiner does, you catch patterns while they’re still easy to fix.
How often you conduct a self-assessment depends on your institution’s risk profile. Many banks and credit unions do these bigger assessments annually while also monitoring higher-risk areas quarterly.
Your self-assessment starts with your risk. Map out your products, channels, and decision points, then identify where risk is most likely to show up. Anywhere a person has discretion (pricing exceptions, credit overrides, fee waivers) deserves a closer look. So do high-volume products like mortgages and third-party channels like brokers or indirect auto dealers.
Then test your highest-risk areas with data. Common analyses include:
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Approval and denial rates across borrower groups with comparable credit profiles
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Pricing, including rates, fees, and exceptions
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Underwriting exceptions and overrides
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Product placement (were applicants who qualified for a prime product steered into a higher-cost one?)
When Maria ran Last Bank’s first pricing analysis, she found that one branch granted rate concessions far more often than the others, and those concessions skewed toward one group of borrowers. Nobody set out to discriminate. The branch manager simply liked to offer discounts to “customers I know.” Unfortunately, the customers he knew looked a lot like him.
That’s the whole point of doing a self-assessment. You find problems before an examiner does and take steps to fix them. We’ll come back to our branch manager in a bit.
Analyze who you’re actually reaching
Your lending analysis tells you how you treat the applicants who walk through your door. But what about the people you never see?
That’s where geographic analysis comes in. Redlining risk isn’t only about who you deny. It’s also about who never gets the chance to apply.
Compare your applications and originations to the demographics of your market, paying close attention to majority-minority and low- and moderate-income census tracts. Then compare yourself to peer lenders in the same area. If similar lenders are generating applications in neighborhoods where you have almost none, an examiner will want to know why.
Look closely at the things that shape who reaches you:
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Branch and ATM locations, including recent openings and closures
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Where your loan officers spend their time
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Marketing targeting (which zip codes get the mailers and which audiences see the digital ads)
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Broker and referral relationships
When Maria mapped Last Bank’s originations, she spotted a cluster of majority-minority tracts on the east side of town with very few applications. The culprit? Last Bank’s digital ads were targeted using past customer data, so they kept reaching the same neighborhoods they always had. To fix this, Last Bank adjusted its targeting, added loan officer hours at an east-side community center, and started tracking application volume there every quarter.
Remember, this analysis only works if you have accurate geocoding. If addresses land in the wrong census tracts, your maps tell the wrong story before you’ve even started.
Create a documented, consistent policy
A fair lending program is only as good as your institution’s policies. Without clear, written standards, how can you expect anyone to follow the rules and avoid risk? Your policy makes consistent decisions possible.
A strong fair lending policy should:
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State your institution’s commitment and assign clear ownership, including who reports to the board
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Define underwriting and pricing criteria clearly enough that two loan officers would reach the same answer
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Spell out when exceptions are allowed, who can approve them, and what documentation is required
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Cover marketing review, third-party oversight, complaint handling, and training
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Explain how monitoring works and how findings get escalated and corrected
Any time an exception is made, it deserves special attention. While exceptions aren’t inherently bad (banking is full of reasonable judgment calls), the risk comes when nobody can explain why an exception happened.
While updating Last Bank’s written policy, Maria worked with lending leadership to create a short list of approved exception reasons, required a second approval above a set threshold, and logged every exception with a reason code. For the first time, Last Bank actually had exception data to monitor.
And don’t forget to keep the policy current. Review it at least annually, plus whenever regulations change, you launch a new product, or monitoring finds an issue.
Train staff properly
Even if you write the best fair lending policy in the world, it means nothing if your institution’s staff isn’t properly trained on it.
“Properly” is the most important part. Your training process should be:
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Role-specific. Loan officers need to understand pricing, exceptions, and steering. Underwriters need consistency. Marketing needs to understand targeting and messaging. Frontline staff need to know that pre-application conversations count. Your board needs to understand oversight and what the reports are telling them.
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Practical. Use real scenarios instead of reciting regulations. If a customer walks in asking about a home loan, does every employee give them the same information and the same level of help?
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Ongoing. Annual training is a baseline. Add targeted refreshers when policies change or monitoring reveals a problem.
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Documented. Track who completed what and when. If you can’t prove the training happened, it may as well not have.
Remember Last Bank’s discount-happy branch manager? Maria realized he didn’t need an hour-long history of ECOA. He needed a 20-minute conversation about why consistent pricing matters, how the new exception process works, and what good documentation looks like. Targeted training usually does more than generic training ever could.
Monitor your fair lending program year-round
If fair lending only crosses your mind when it’s time for an exam, then you don’t have a strong (or even working) program.
You need to think about fair lending risk and monitor your institution’s data year-round. Otherwise, your exam is bound to be awkward.
Year-round monitoring might include:
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Quarterly reviews of pricing, exceptions, and approval and denial rates
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Reviewing your HMDA data for patterns before submitting it
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Watching complaints for fair lending themes, like customers who say they were treated differently
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Reviewing new marketing campaigns before launch
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Overseeing third parties such as brokers and dealers
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Regular reporting to senior management and the board
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Tracking corrective actions until they’re actually finished
A year after Maria began improving Last Bank’s fair lending program, the bank’s quarterly reports showed exception rates leveling out across branches and application volume growing on the east side. The next exam wasn’t painless (unfortunately, none are), but when the examiner asked how Last Bank knew its lending was fair, Maria didn’t have to scramble. She pulled up a year of analyses, findings, and fixes.
That’s what a strong fair lending program looks like in real life.
Where to start
If all of this feels like a lot, that’s because it is. The good news is that you don’t have to build it all at once. Instead of panicking, try taking these steps one at a time:
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Take inventory. What policies, reports, training, and data do you already have? Who owns each piece?
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Complete a risk assessment. Identify your highest-risk products, channels, and decision points.
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Pull the data you already have. Your HMDA data and loan origination system are good places to start.
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Run one analysis. Pick your highest-risk area, like mortgage pricing exceptions, and look.
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Fix what you find and document it. Then share the results with leadership.
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Set a monitoring calendar. Decide what gets reviewed monthly, quarterly, and annually.
The hardest part for most teams isn’t knowing what to do. It’s getting the data to answer their questions. Pulling exports from multiple systems, building pivot tables, cleaning up geocodes, and rebuilding the same reports every quarter takes a lot of time. And let’s be honest, you don’t have time to spare.
That’s where Kadince’s Fair Lending Compliance software can help. Kadince brings your fair lending data, analysis, and documentation into one place, so you can:
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Analyze lending activity to identify potential disparities
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Review pricing and underwriting decisions across loan populations
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Analyze geographic and redlining risk, including peer comparisons
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Monitor trends across products, channels, and borrower characteristics
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Keep a clear, defensible record of findings and corrective actions
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Create reports for your board and your examiners that update in real time
You’ll never eliminate fair lending risk completely. But with a strong fair lending program, you can catch it early, fix it fast, and answer “How do you know?” with confidence. To see how Kadince can help you build a strong fair lending program, schedule a demo.
None of Kadince, Inc., its affiliates, or its respective employees, directors, officers, and agents (collectively, “Kadince”) are responsible or liable for any content or information incorporated herein. Read full disclosure.
