Title: Fair Lending Oversight Could Be Enhanced Description: Fair Lending laws are meant to protect Americans when they're applying for things like loans, mortgages and credit cards from discrimination based on their race, national origin gender and more. But our new report finds opportunities to enhance oversight of these requirements. We find out more from GAO's Mike Clements. Related GAO Work: GAO-22-104717, Fair Lending: Opportunities Exist to Enhance OCC's Oversight of Banks' Lending Practices Released: June 2022 [Mike Clements:] OCC has opportunities to improve its balance of efficiency and effectiveness, and also the consistency of its redlining exams. [Holly Hobbs:] Hi and welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability Office. I'm your host, Holly Hobbs. Fair Lending laws are meant to protect Americans when they're applying for things like loans, mortgages and credit cards from discrimination based on their race, national origin, gender and more. But how is compliance with these laws monitored, and are there any gaps in this oversight? Today we'll find out more from GAO's Mike Clements, an expert on banking and market regulation and a director in our Financial Markets and Community Investment team. Thanks for joining us. [Mike Clements:] I'm happy to be here. [Holly Hobbs:] So Mike, let's start with, who is responsible for overseeing banks' compliance with Fair Lending laws and how do they do it? [Mike Clements:] It varies. We've previously reported that the U.S. has a complex and fragmented financial regulatory system. And that equally applies to Fair Lending oversight. For this report, we examine the Office of the Comptroller Currency, OCC, which oversees national banks. OCC takes several steps to oversee Fair Lending. First, it assesses the risk that a bank will have a Fair Lending violation. And it does so for over 1,000 banks that it supervises. It also conducts Fair Lending examinations for compliance with Fair Lending laws. For example, disparities in lending. And in 2020, it conducted 63 of these examinations. [Holly Hobbs:] And for our new report, your team look at some of OCC's examinations of potential discrimination in loan underwriting--things like redlining. What did we find? [Mike Clements:] Yes, we looked at whether examiners followed OCC's policies and procedures when conducting Fair Lending exams. We found that examiners followed policy on exams covering underwriting--that is a bank's decision, for example, to extend credit--and also for pricing--the bank's decision on interest rates and fees. However, examiners inconsistently followed policy on redlining. Redlining are disparities in geographic areas--for example, lower lending in a minority area compared to a non-minority area. We also found that the guidance was outdated, which ultimately contributed to some of that inconsistency. [Holly Hobbs:] And what happens when a violation or a potential violation of Fair Lending law is found? [Mike Clements:] OCC has several options to address deficiencies. It can take informal or informal enforcement action. For example, entering into a consent decree to require a bank to correct a deficiency. Or it can make referrals to the Department of Justice if there's a pattern and practice of discrimination for DOJ to take civil action. [Holly Hobbs:] And this is new right? Prior to 2021, OCC generally didn't take enforcement actions if the Department of Justice was pursuing one. What changed? [Mike Clements:] That's correct. Prior to 2021, OCC would not take enforcement action what DOJ was considering the case, and it would only take enforcement action when DOJ declined to take civil action. Now, OCC will take enforcement action independent of DOJ's action. This policy allows OCC to more fully use its enforcement authority. [Holly Hobbs:] And another change we looked at is how OCC screens retail lending activities at mid-size and community banks. Can you tell us a little bit about what changed? [Mike Clements:] Community and mid-size banks represent most of the banks that OCC supervised. But they also represent a small share of bank assets. These are smaller banks. To select these banks for Fair Lending exams, OCC has made two changes. First, itself focusing on banks with three years to statistically significant differences in lending based upon a protected class. In the past, it only looked at differences in one year. Secondly, it also eliminated random with selected banks, which it used in the past. [Holly Hobbs:] And why the change? [Mike Clements:] The purpose of these changes was to more efficiently target its Fair Lending resources to those banks with the greatest risk of violations. However, this change also contributed to the decline in the number of exams. For example, in 2017, OCC had conducted 178 exams at community and mid-sized banks. In 2020, it only conducted 35. {MUSIC} [Holly Hobbs:] So Mike just told us that in our new report, we found inconsistencies in OCC's examinations of banks for compliance redlining, and outdated guidance that could have contributed to that inconsistency. And that changes in oversight may have reduced the number of examinations OCC conducts. So Mike, what actions do we think OCC needs to take to improve its oversight of Fair Lending law? [Mike Clements:] We made recommendations in two areas. First, for redlining, we recommended that OCC update is policy to ensure it reflects current processes and identifies steps examiners should take to evaluate redlining. Second, for community and mid-sized banks, we recommended OCC gather and analyze information on its Fair Lending exams to ensure that it has an appropriate balance between the efficient use of its resources and identification of violations. [Holly Hobbs:] And last question. What's the bottom line of this report? [Mike Clements:] OCC performs an important role to ensure that banks comply with Fair Lending laws and regulations which is especially important given the persistent wealth disparities in the United States. OCC has made changes to improve its enforcement capacity, but it also has opportunities to improve its balance of efficiency and effectiveness, and also the consistency of its redlining exams. [Holly Hobbs:] That was Mike Clements talking about GAO's review of Fair Lending law oversight. Thanks for your time, Mike. [Mike Clements:] It was my pleasure [Holly Hobbs:] And thank you for listening to The Watchdog Report. To hear more podcasts subscribe to us on Apple Podcasts, Spotify or wherever you listen, and make sure to leave a rating and review to let others know about the work we're doing. For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at GAO dot gov.