Fintech Week in Review – April 2021 #2 | Perkins Coie

Weekly Fintech Focus

• FDIC discusses its fair lending activities in the most recent edition of its Consumer Compliance Supervisory Highlights.
• US and EU engage in a joint regulatory forum to discuss international coordination on financial regulation and operational resiliency.
• BCBS publishes its principles for operational resilience for banks, including a focus on third-party outsourcing relationships with financial technology companies.
• Financial regulators seek comment on model risk management guidance.
• CSBS seeks comment on a revamp of the nationwide licensing system.

FDIC Consumer Compliance Supervisory Highlights Fair Lending Risks

The Federal Deposit Insurance Corporation (FDIC) has issued the March 2021 edition of its Consumer Compliance Supervisory Highlights. The publication was established to highlight consumer compliance issues identified in 2020. This publication consists of a summary of supervisory observations related to consumer protection laws and best practices that may be useful in mitigating risks for financial institutions, among other things.

The federal fair lending laws of the FDIC prohibit discrimination in credit transactions. As part of every consumer compliance examination, the FDIC conducts a fair lending review to evaluate financial institutions’ compliance with the fair lending and antidiscrimination practices of the FDIC. In 2020, the FDIC reported three fair lending violations to the U.S. Department of Justice as required by law. These reported violations are referenced below.

• The FDIC identified an instance involving an institution that originated unsecured loans through a third party, which allowed applicants to apply for credit directly on its website. Examiners found that the underwriting criteria included the prohibited bases of age and receipt of public assistance income. Specifically, an applicant who was under the age of 30 would be denied. Any applications that included a source of public assistance income would similarly be denied.
• Next, the FDIC identified an institution using a third-party credit-scoring model to offer consumers unsecured lines of credit. This credit-scoring model scored younger applicants more favorably than elderly applicants, and the model similarly scored applicants that noted they were on maternity leave less favorably than non-maternity leave applicants.
• Lastly, examiners of the FDIC identified a policy that provided a different pricing model for married joint applicants compared to unmarried joint applicants. If the applicants were married, the policy instructed the loan officer to use the highest credit score of the two applicants to price the loan. If they were unmarried, the loan officer was to use the credit score of the primary applicant (which, in the institution’s view, was the person listed first on the credit application). The FDIC noted that this policy led to unfavorable pricing for unmarried applicants. The effect of the policy was to price applicants differently based on their marital status, which is prohibited.

To mitigate violations, financial institutions may consider maintaining a strong compliance program and reviewing fair lending laws regularly to ensure compliance with such antidiscrimination laws. Financial institutions may also require the maintenance of policies and procedures to shield creditors from making these violations.

US and EU Participate in Joint Financial Regulatory Forum

Recently, financial regulators from the United States and the European Union participated in a Joint Financial Regulatory Forum to discuss topics of mutual interest related to the financial regulatory landscape. The forum focused on (1) COVID-19 recovery and mitigating financial stability risks; (2) sustainable finance; (3) multilateral and bilateral engagement in banking and insurance; (4) regulatory and supervisory cooperation in capital markets; (5) regulatory and supervisory developments regarding financial innovation;…