In recent remarks at the CRA & Fair Lending Colloquium, Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy at the Office of the Comptroller of the Currency, discussed the OCC’s current fair lending initiatives. Her remarks were intended to convey the message that the OCC is “laser focused on fair lending” and considers fair lending compliance to be an important component of safety and soundness.
A substantial portion of Ms. Gardineer’s remarks were devoted to the OCC’s efforts to improve its ability to identify potential patterns or practices of discrimination. She indicated that those efforts include taking steps to enhance the OCC’s risk-based supervisory approach by:
- Routinely reviewing and updating the OCC’s annual risk-based processes for screening HMDA data to ensure the OCC’s focus is on banks with higher fair lending risk.
- Conducting fair lending risk assessments during every supervisory cycle for each bank that engages in retail lending and based on what the OCC learns from such risk assessments as well as the HMDA screenings, identifying banks for in-depth fair lending examinations.
- Having a framework in place to ensure that banks are following fair lending rules as they incorporate advanced analytics, such as artificial intelligence or machine learning, into underwriting systems and fair lending risk management programs, including providing the support of legal and policy subject matter experts as well as economists to OCC examiners conducting fair lending examinations of banks using advanced analytics.
- Enhancing examiner tools, resources, and training, including:
- Preparing to publish a comprehensive update to the Fair Lending Booklet of the Comptroller’s Handbook that will be accompanied with more instructional guidance for examiners.
- Enhancing technical support for the OCC’s Fair Lending Risk Assessment Tool used by examiners.
- Conducting a series of redlining webinars for examiners.
- In response to a recommendation included in a June 2022 GAO report on the OCC’s oversight of fair lending practices, creating a centralized tracking and monitoring system to collect and analyze information related to fair lending examinations.
Ms. Gardineer also discussed other OCC efforts “aimed at reducing persistent economic inequality and growing trust in banking.” These efforts include:
- Working jointly with the other federal banking agencies to issue a final Community Reinvestment Act rule.
- Participating in the Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), which has issued an Action Plan to Advance Property and Valuation Equity.
- Helping to enhance federal oversight and effective monitoring for discrimination in appraisals and technology-based valuations of residential property within the scope of the OCC’s authority (which Ms. Gardineer noted does not include direct supervision of real estate appraisers), including by taking the following actions in the PAVE action plan:
- Strengthening coordination among supervisory and enforcement agencies to identify both safety and soundness and fair lending concerns that result from bias or discrimination in appraisals and other valuation processes.
- Expanding regulatory agency examination procedures of mortgage lenders to include identification of patterns of appraisal bias.
- Improving supervisory methods for identifying potential discrimination in property valuations. (The CFPB is also a participant in PAVE. In February 2022, the CFPB, together with other federal agencies including the OCC, sent a letter to The Appraisal Foundation commenting on proposed changes to the Uniform Standards of Professional Appraisal Practice in which the agencies expressed concern that that the standards did not adequately advise examiners about ECOA and FHA nondiscrimination standards.)
With respect to fair lending concerns raised by advanced analytics, Ms. Gardineer indicated that the OCC “supports fair, ethical, responsible, and transparent adoption of advanced analytics, including artificial intelligence and machine learning, in the financial sector.” She observed that advanced analytics “can offer benefits, including opportunities to expand access to banking services that could help to reduce inequality and increase trust in the banking system” but also “bring risks, primarily from failed or inadequate management of model risk.” More specifically, she commented that because “[f]ailure to appropriately manage models’ compliance risk can contribute to model biases and create adverse effects for consumers,” bank must use appropriate oversight, expertise, and controls to mitigate the risk of discrimination under the ECOA and FHA, unfair, deceptive, or abusive acts or practices under Dodd–Frank, unfair or deceptive acts or practices under the FTC Act, and privacy concerns. Ms. Gardineer also commented that “even when individual variables are not inherently biased, the complex interactions typical of some advanced analytics can lead to unintended effects or outcomes.” She indicated that to control for this risk, lenders need “to devote adequate and integrated technical and compliance expertise to develop and implement risk management,” which may include (1) suitable processes to make complex models understandable, (2) change management and model governance that appropriately prioritizes fairness, (3) sufficient third-party risk management, and (4) independent validation of these processes and controls when warranted. She also observed that the use of alternative data in credit decisions can benefit consumers who would otherwise be denied credit when only traditional data is used.