Preparing for increased fair lending compliance scrutiny

In recent years, financial institutions have faced increased regulatory oversight in fair lending compliance. With heightened enforcement actions, regulators are focusing on disparate impact, lending patterns, and outreach efforts, even for smaller institutions. This article explores key compliance risks, common pitfalls, and proactive strategies to help financial institutions meet regulatory expectations.

The Rise in Fair Lending Enforcement

Regulatory agencies are doubling down on fair lending violations, making compliance a top priority for financial institutions.

• The Department of Justice (DOJ) has significantly increased fair lending referrals in recent years.
• Even small and mid-sized institutions are now under greater scrutiny.
• Examiners are conducting disparate impact analysis to assess lending decisions.
• Fair lending reviews are now integrated with Community Reinvestment Act (CRA) assessments to identify redlining risks.
• Majority-minority census tract review is being incorporated along with the income level of the census tract.

With regulators leveraging large datasets to track lending disparities, financial institutions benefit from taking proactive steps to assess their fair lending risks before facing regulatory scrutiny or inquiries.

How Regulators Identify Fair Lending Violations

Regulators focus on three types of violations:

• Overt evidence of disparate treatment: Clear, intentional bias in loan approvals.
• Comparative evidence of disparate treatment: Unequal loan terms, rates, or service based on prohibited factors.
• Disparate impact: Policies that unintentionally disadvantage protected groups.

To detect irregularities, regulators combine census data, loan applications, Home Mortgage Disclosure Act (HMDA) data, and CRA assessments. Financial institutions must conduct similar internal analysis to stay compliant and aware of any potential disparities existing in their data.

Proactive Steps for Financial Institutions

Financial institutions should assess fair lending risks in advance of regulatory reviews or examinations.

• Conduct internal fair lending reviews to detect potential issues.
• Use peer data analysis to compare lending patterns with similar institutions.
• Implement data-driven monitoring to flag discrepancies in approvals and interest rates.
• Train loan officers on outreach and marketing to underserved communities.
• Maintain thorough documentation to support and defend lending practices.

Why Data Analysis is Critical for Compliance

Regulators are leveraging advanced artificial intelligence (AI) and statistical models to assess fair lending risks.

• The DOJ uses software to analyze mortgage application rates by census tract.
• CRA data is now cross-referenced with racial, ethnic, and gender demographics.
• Institutions are using statistical analysis to validate their lending practices.

Failing to conduct thorough internal reviews leaves financial institutions vulnerable to enforcement actions and reputational damage.

The Role of Continuous Monitoring in Fair Lending Risk Assessments

A static risk assessment is no longer enough. Regulators expect institutions to continuously monitor and update their fair lending policies.

• Align underwriting practices with documented, objective criteria.
• Use benchmarking to compare the number of applications received, loan pricing, and approval rates against peers.
• Proactively address red flags before regulators identify them.

A well-documented and dynamic fair lending risk assessment that incorporates inherent risk with qualitative and quantitative factors helps demonstrate proactive compliance and reduces regulatory risk.

Top Compliance Challenges in 2025

Despite political changes, fair lending is expected to remain a regulatory priority.

• Regulatory focus may evolve with the new administration, but scrutiny is unlikely to decrease.
• Pending legislation could alter enforcement actions, but oversight will likely remain strong.
• AI in lending introduces new challenges for compliance and bias detection.

A Proactive Approach is the Best Defense

Fair lending compliance requires ongoing monitoring, rigorous data analysis, and proactive outreach.

Elliott Davis can help financial institutions assess lending patterns, analyze their data, identify potential disparities, train staff, and implement strong internal controls. Download our comprehensive PDF on the topic, watch the full webinar replay below, or contact our team today to discuss how you can prepare for the changes ahead.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.