High-profile government actions against some of the nation’s largest financial firms for alleged violations of fair lending laws and loan servicing principles have sent a sobering message to industry CEOs and their boards: the buck stops at the top.
We have entered a new regulatory era, one filled with expectations that a firm’s compliance with the letter and spirit of the law has the full attention of the C-suite and boardroom — not relegated to back-office compliance department functions.
We’d be mistaken to think this new environment is transitory, tied to one presidential administration or another. While the current leadership is vocal relative to consumer protection and racial equity issues, there are permanent, institutional commitments to fairness in housing and housing finance that have been enshrined in law for decades and that transcend politics.
A number of economic, legal, policy and public pressures will continue to keep fairness issues front-and-center for the foreseeable future — particularly around lending and loan default servicing. The compliance landscape for lenders and servicers will be increasingly complex as some oversight agencies and advocates evaluate and re-evaluate what constitutes unlawful or unfair conduct.
Indeed, multiple agencies pursuing the same general goals sometimes creates inconsistencies or conflicting interpretations of policy, making it difficult for financial institutions to navigate uncharted waters, even with the best of intentions. Recent regulatory actions have targeted marketing practices, credit allocation and product offerings.
Regulators will look to ensure that a financial firm’s leadership is accountable and actively managing their fair lending and servicing efforts. Companies will be judged on whether they are maintaining appropriate compliance management systems, including monitoring, written policies, risk management, change management, testing and company culture — and whether their boards are equally focused on their oversight function.
In this swirl of challenges, financial executives who fail to pay attention can face legal costs, fines, penalties, consent orders and contested litigation — or worse. Just ask the ones who in the recent past have lost their jobs or faced reputational damage.
CEOs need to understand their firm’s capacities and get ahead of problems before they become crises. Specifically, they need to work closely with the team members who are responsible for legal and compliance monitoring to reduce legal risks, comprehend data that might indicate disparate treatment or impact, identify gaps that may exist in their knowledge and experience and structure management teams accordingly so that they reflect a comprehensive approach to compliance. And they need to engage all board members, keep them informed, seek their guidance and make them aware of their own potential legal peril.
Most importantly, financial firms should work to understand the intent, not just the letter, of multiple rules and laws, as well as the mindset of varied enforcement bodies. Strong compliance programs are prudent, meaning they are focused on avoiding regulatory challenges, even if some practices might be defensible.
If financial executives do business anywhere along the housing supply chain, they are willingly part of our nation’s effort to live up to its highest ideals of helping to create homeownership opportunities and fairness for everyone.
As part of that obligation, private sector players are endowed with a complex, at times conflicting, set of actions under often-difficult-to-construe fair lending laws. They become vehicles for delivering public policies and bear risk while trying to implement them. However, as a result, company leaders are often required to think more like partners with regulators and agencies rather than their adversaries. It warrants mention that government agencies should recognize this relationship can work both ways — they too have obligations to their private sector partners, chief among them transparency, open dialogue and technology improvements.
As an industry, we must continue to act responsibly on the issues of compliance and discrimination. The struggle for equality and fairness will forever be a continuing part of the American experiment. All of us can be part of the solution. And it starts at the top.
Brian Montgomery is a founding partner of Washington, D.C.-based Gate House Strategies.
