2025 Risk Series:  Fair Lending & UDAAP Violations

The Regulatory Risks

Regulators continue to scrutinize Fair Lending and Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) violations, with community banks at heightened enforcement risk. Through recent public statements, enforcement actions, and regulatory guidance, the OCC, FDIC, and FRB have signaled that ensuring fair and non-discriminatory access to credit is a top priority. Failure to comply can result in substantial fines, mandated restitution, increased supervisory oversight, and reputational damage.

Example Enforcement Actions

• Green Dot Corporation (2024):  Fined $44 million by the FRB for unfair and deceptive practices related to prepaid debit cards and tax refund processing, as well as deficiencies in consumer compliance risk management.

• American Bank of Oklahoma (2023):  Settled with the DOJ for redlining allegations following an FDIC referral; required to invest $1.15 million in underserved communities and establish a loan production office in a Tulsa neighborhood with a significant African American heritage.

• Trustmark National Bank (2021):  Fined $4 million by the OCC for redlining and failing to provide equal lending opportunities in minority communities violating the Fair Housing Act.

Key Risks to Address Now

• Redlining & Discriminatory Lending Practices:  Banks must ensure that lending programs do not exclude or discourage applicants from protected classes.

• UDAAP Compliance & Fair Treatment of Consumers:  Products and services should not contain unfair or deceptive terms, and fees must be disclosed clearly.

• Third-Party Risk Management:  Lenders working with fintechs or third-party loan originators must ensure ongoing compliance with Fair Lending laws and avoid abusive practices.

• Data-Driven Disparate Impact Risks:  Even unintentional discrimination in lending algorithms or underwriting criteria can lead to enforcement actions.

Strategies to Strengthen Compliance & Mitigate Risk

• Enhance Fair Lending & UDAAP Compliance Programs

  • Conduct regular risk assessments and independent audits to ensure compliance.

  • Implement policies and procedures that explicitly prohibit discriminatory lending practices.

• Improve Loan Origination & Underwriting Processes

  • Use data analytics to detect disparities in lending decisions.

  • Conduct regular testing to ensure credit decisions are fair and non-discriminatory.

• Increase Transparency in Marketing & Servicing

  • Clearly disclose loan terms, fees, and conditions to avoid misleading consumers.

  • Ensure all advertising is compliant with Fair Lending laws and does not target vulnerable consumers unfairly.

• Strengthen Training & Oversight

  • Provide ongoing Fair Lending and UDAAP training for employees and board members.

  • Strengthen oversight and compliance monitoring of all third-party vendors involved in loan origination or servicing.

Take Action Now

Community banks must be proactive in addressing Fair Lending and UDAAP risks to protect their institutions from regulatory enforcement and fines. Strengthening compliance frameworks, improving transparency, and leveraging data-driven insights can help mitigate risks and ensure fair access to credit.

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Stay tuned for the next edition in our blog series:  "Credit Risk & Loan Portfolio Quality."