In response to a request from three Democratic House members, the GAO recently issued a report on its review of fair lending oversight conducted by the Office of the Comptroller of the Currency. According to a Law360 report, the lawmakers had petitioned the GAO nearly two years ago to open an investigation into allegations that the OCC had quietly dropped several fair lending investigations during the Trump Administration. While fair lending has already been identified as a priority for banking regulators by the Biden Administration, the GAO report, particularly its findings regarding the decline in annual fair lending examinations and deficiency findings leading to matters requiring attention at smaller banks, could further fuel the OCC’s focus on fair lending.
The GAO conducted the performance audit from January 2021 to June 2022.
The GAO looked at (1) how the OCC identifies and addresses any deficient fair lending risk management practices at supervised banks and refers potential fair lending cases to the Department of Justice, (2) the extent to which OCC examiners followed policies and procedures in a sample of 15 fair lending examinations conducted in 2018 to 2020, and (3) how examination selection processes have changed and the effects of the changes on OCC fair lending oversight.
The GAO’s key findings were:
- Based on a review of 10 underwriting and pricing fair lending examinations, examiners generally followed OCC procedures and used consistent processes and analytical methods for assessing evidence.
- Based on a review of 5 redlining examinations, examiners followed procedures inconsistently. In three of the five examinations, examiners did not find the banks’ responses disputing their findings to be satisfactory. They consequently concluded that the banks had engaged in potential redlining based on the lack of a satisfactory explanation from the bank for the statistical disparities and underperformance in relation to peer banks. In the other two examinations, examiners also considered the banks’ responses, but took further steps before arriving at a conclusion as to whether the bank had engaged in potential redlining. In addition to conducting additional analyses, the examiners considered other factors to support or contradict interpreting identified disparities to be the result of intentional discrimination. In both examinations, examiners concluded that the bank had not engaged in redlining.
- The OCC’s 2010 handbook does not account for new statistical analyses and methods for analyzing potential redlining since it was issued and therefore lacks specificity on how examiners should build on OCC economists’ statistical analyses and conclusions when conducting a redlining review.
- Starting in 2018, the OCC has made substantive changes to its annual screening and selection processes for fair lending examinations at smaller banks. These changes contributed to fewer annual fair lending examinations and deficiency findings leading to matters requiring attention at smaller banks.
Based on these findings, the GAO made the following observations and recommendations:
- Outdated and unclear examination guidance can lead examiners to conduct inconsistent analyses of potential redlining violations. Because examiners’ conclusions are the basis for consideration of a referral to DOJ or an enforcement action, this ambiguity could also lead to inconsistent opportunities for legal review of potential redlining violations. As the OCC updates its redlining examination procedures, the Acting Comptroller should ensure that the Compliance Risk Policy Division takes into account new types of analyses being performed when it documents the steps that examiners should take in evaluating potential redlining violations.
- The OCC has failed to systematically evaluate the trade-offs made each year between efficiency given available resources and effective identification of fair lending deficiencies and violations when it identifies and selects problematic fair lending activities of smaller banks for examination. The Acting Comptroller should ensure that the Compliance Risk Policy Division and Office of Midsize and Community Bank Supervision establish time frames for carrying out their plan to (1) centralize data on examiners’ rationales for not examining lending activities identified as having elevated fair lending risk, and (2) establish a process to track the outcomes of fair lending examinations. The Compliance Risk Policy Division should use this information to analyze its screening and selection processes on an going basis to ensure an appropriate balance between efficiency and effectiveness.
To address these recommendations, the OCC has indicated that it will:
- Update its fair lending examination procedures to, among other things, clarify and expand the list of redlining factors and highlight certain key points regarding redlining case elements that have historically raised concerns. The updated procedures are expected to be issued no later than December 31, 2022.
- Develop additional training for examiners to highlight redlining examination best practices. Training webinars are expected to be made available to examiners no later than September 30, 2022.
- Work to develop a centralized process and procedures to collect and monitor information on fair lending activities that will include, among other things, procedures regarding the selection and non-selection of identified focal points and the disposition of focal points not selected. The target date for implementing this process is January 1, 2023.
The OCC’s response to the GAO report is another indication of increasing attention by federal banking regulators on fair lending, a trend warranting close industry scrutiny as policies and processes evolve and change.