The Fair Lending Risk Assessment – The Finale
The fair lending risk assessment is an integral component of and the springboard for your fair lending program. It is a critical risk management tool that enables the institution to identify and measure the risk inherent in the institution, measure the risk inherent in the bank’s lending s lending processes and to determine what control and
processes and to determine what control and monitoring mechanisms are in place to protect monitoring mechanisms are in place to protect against illegal discrimination.
Why do I need to do a risk assessment?
As with all risk assessments, the intent is to identify the inherent risk (risk without internal control) and to evaluate the control mitigants to determine their effectiveness in addressing the inherent risk. Residual risk is the remaining risk that the institution must review to determine if it is acceptable to the institution or if it is indicative of additional gaps in the lending process that require further mitigation. The institution’s fair lending program is built from this foundation.
So where is fair lending risk hiding in my institution?
Fair lending risk can occur throughout the lifecycle of the lending relationship and is typically due to policies and practices which may be overtly discriminatory; application of a nondiscriminatory policy that has an inadvertent discriminatory effect or the use of discretion in the lending function relative to a prohibited bases with adverse impact. It is also important to include any affiliates or subsidiaries which are part of the lending process and lifecycle.