NCUA makes financial inclusion a focus in upcoming exams

This past fall, the NCUA introduced ACCESS — Advancing Communities through Credit, Education, Stability and Support — an initiative designed to support diversity and inclusion in the credit union system.

“Financial inclusion is the civil rights issue of our time,” said NCUA Chairman Rodney E. Hood.

In addition, the NCUA is focused on helping borrowers in communities of color, which have been experiencing disproportionate hardships during the pandemic, Hood said during a recent webinar.

During the pandemic, credit unions have directed many of their resources to handling loan accommodations and modification requests for borrowers impacted by the pandemic.

Credit unions should expect NCUA examiners to expand the scope of its examinations to test for potential discriminatory lending and servicing practices. Regulatory compliance and safety and soundness will remain at the forefront of examinations; however, we expect enhanced scrutiny of the treatment of members in low-income or majority-minority communities and how a credit union has contributed to helping its members in need.

With rising unemployment and an unrelenting pandemic further escalating economic uncertainty, borrowers will be looking to their community lenders for relief — through temporary forbearance agreements, deferments or possibly a small dollar loan to bridge the gap. Throughout the COVID-19 pandemic, the NCUA has stressed that accommodations made by credit unions will play an important role in examinations. The NCUA indicated that if it is clear the credit union has made a good-faith effort to help borrowers in need, they would not be subject to examiner criticism.

We recommend credit unions perform an internal review of responses to borrowers’ requests for relief. When credit union leadership reflects on the credit union’s response to the surge of modification applications and requests received in light of the pandemic, one thing that should be assessed is whether or not management and staff acted precipitously. The reality is that a decision to approve or decline a request may not appear discriminatory on its face. Were borrower requests met with gratuitous paperwork or needless red tape that would inhibit the borrower from completing the process? If the answer to this question is yes, the practices may be subject to scrutiny unless the credit union can demonstrate the significance of operating procedures and controls — for example, to mitigate fraud or to ensure borrowers were not accumulating more debt. Another consideration: Do accommodation approvals favor any particular demographic or geographic area? If the credit union proactively advertised accommodation programs, did all members receive notice of the program, or was the program limited to certain members? Again, these practices are subject to scrutiny by examiners and may lead to disparate impact. It’s important to remember that the expected impact of a decision will be longer term when there is a greater potential for a more severe impairment to the borrower’s ability to repay. 

We also want to remind credit unions that the CARES Act contained provisions that protects members who have entered into a modification agreement from unfair credit reporting practices. Credit unions are advised to work with systems’ providers to ensure COVID-19-related delinquencies covered under a modification agreement are properly excluded from credit reporting. Further, it’s important to evaluate disclosures and paperwork to ensure the credit union is transparent and has made clear the implications of the borrower’s accommodations. Appropriately updating policies and procedures and ensuring staff who work with impacted borrowers understand the new policies and procedures are necessary to ensure processes for accommodations are applied consistently.

In addition to the COVID-19 accommodations, the NCUA has also vocalized other lending discriminatory issues and considerations this year:

• Marital status discrimination includes any noted differences in treatment of married applicants and nonmarried applicants. We recommend credit unions treat credit report fees for single, joint nonmarried, and joint married applicants consistently. When the fees are passed on to borrowers, the cost of a joint report should be the same cost as two individual reports. If the cost for a joint report is less than for two individual reports, it’s important to consider the fee structure and whether the structure is equitable. Another consideration is the handling of loan rate pricing for married vs. nonmarried applicants — ensure pricing is uniform for single applicants, nonmarried joint applicants, and married applicants.
• Conditions for when a loan obligation requires a co-borrower or co-signer should be considered. Ensure it is not a requirement for a co-borrowers or cosigners to be a spouse. It is also important to consider state laws governing co-applicant requirements.
• Age remains a significant issue. It should not be taken into consideration unless the borrower has not reached the age to consent to a contractual legal obligation.

While this is a difficult time for communities facing economic uncertainty, the silver lining is that it is also an opportune time for credit unions to continue to help serve the underserved in their communities; more significantly, credit unions are in a position to build financial strength in minority communities by providing access to appropriate products and services to those in need. Credit unions require safe and sound business practices, strong regulatory compliance culture and an inclusive mindset to build and grow the trust and loyalty of their membership base, in addition to providing financial inclusivity for all.