Financial institutions like to keep their losses to a minimum when it comes to delinquent loans, but has your institution considered its Fair Lending risks associated with the process of collecting debt? As we delve into this question, let’s consider how a compliance officer or collections officer would know what examiners expect to see in place for the debt collection process. Do you start by reading the Fair Lending regulations? How boring! Let’s cut to the chase and go straight to the source. I always look to the Fair Lending Exam Manual or the Interagency Fair Lending Examination Procedures to gain insight. As we walk through the debt collection process, let’s keep in mind the prohibited bases found in the Equal Credit Opportunity Act (ECOA): race, color, religion, national origin, sex, age, marital status or receipt of public assistance. Similarly, under the Fair Housing Act, the prohibited bases include race, color, national origin, religion, sex (including gender, gender identity, sexual orientation and sexual harassment), familial status and disability. These prohibited bases also apply to debt collections. A potential Fair Lending issue could arise if, during the debt collection process, the collections department fails to provide a borrower with information or services regarding any aspect of the lending process, including debt collection. Examples: • The bank tends to work more with married couples, assuming they have two incomes and are more likely to repay the debt if the bank refinances the loan. Single borrowers are not offered a refinance as quickly, based on the assumption that their repayment ability may not be as strong. • A loan officer who performs their own collections tends to work more closely with male borrowers, giving them multiple workout options to avoid foreclosure, while similar options are not offered to female borrowers. To help avoid these situations, the institution can conduct its own analysis of collection procedures with Fair Lending in mind, using available collection data. This process can highlight potential concerns or disparities. Mitigating Fair Lending Risk in Collections What can financial institutions do to avoid any perception of Fair Lending issues in the debt collection process? A good starting point is to centralize the collection process and prohibit lenders from collecting their own debts. Ensure the bank has written collection procedures that include the loss mitigation options offered by the institution. Promote consistency in procedures so that the same options are offered to all borrowers. Procedures should instruct collection staff on how to use the various means of communication — including text messages, email, social media and phone calls — to effectively and fairly reach borrowers. Consider how the institution is represented in these communications. Avoid using third-party debt collectors unless you are very familiar with their practices and compliance with the Fair Debt Collection Practices Act (FDCPA). Address any incentives paid by the bank to ensure compensation structures do not promote unfair treatment or result in discriminatory outcomes. Have You Covered Fair Lending Considerations in the Debt Collection Process? By TARA BOOTH Virtual Compliance Officer, Compliance Alliance 20 NEBRASKA INDEPENDENT BANKER
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