Posted by Trey Sullivan on Thu, Jun 17, 2010 @ 02:19 PM
In our business we interact with bankers every day. And what we are hearing from them now reflects a real change in attitude and regulatory focus. Many tell us that their examiners are paying more attention to lending compliance issues, such as fair lending, CRA, and HMDA than at any time in the recent past.
The Assistant Attorney General, Thomas Perez, has recently stated that "lending discrimination is discrimination with a smile and must be stopped." Mr. Perez goes on to say, "the fair lending laws are the most effective way to address this problem and we intend to dust them off and use them to combat this problem". The message is clear; bankers can expect more frequent and more comprehensive fair lending reviews in the future.
As part of a fair lending review, the FDIC and other agencies gather data and build tables and loan pricing matrixes based on race, ethnicity, and gender. If lending disparities are identified, regression analysis is performed to determine if lending discrimination is present. If they determine, through a statistical review, that discrimination may have occurred, they refer the matter to the Department of Justice (DOJ). Once these things are turned over the DOJ, life becomes much more difficult for the bank. The FDIC takes the position that questions referred to other agencies cannot be appealed within the FDIC. However, they do not defer regulatory action related to the fair lending exam. So in addition to the DOJ inquiry, the bank can expect to receive unfavorable CRA ratings and other sanctions that can prohibit other aspects of their operations.
A prudent approach to this increased scrutiny is to be proactive and know what your lending says about your institution... before the examiners do their analysis.
One way to accomplish this is by performing a statistical review of the bank's lending and calculating the originations, denial, and pricing disparities. If disparities exist, dig a little deeper. It sounds daunting, but it is much easier than you think. You can either do this work yourself, purchase software to do the analysis, or outsource it. But regardless of the way you choose to tackle it, the analysis needs to be done at least once a year.
Also, we are hearing that pricing disparity is an area that the examiners are particularity sensitive about right now. The frequency of rate spread loans made to the prohibited basis can be a trigger.
Some institutions use a pricing matrix or guide to ensure uniformity among all loan officers. The key to successfully implementing the pricing matrix comes down to execution and commitment. If you take the time to build the pricing matrix, try not to deviate from it. If you do, make sure a senior manager signs off on the exception. The last thing you need is two different loan officers charging differently for the same loan.
If your bank happens to draw the attention of the examiners, don't wait for them to tell you where the issues are. Do the analysis and review your loan data to support your decision. That will include a thorough review of your lending and may include regression testing. This is not as difficult as it may sound. There are firms that can help with this assessment work including TruPoint Partners.
The regulators are under a tremendous pressure from Congress to be more thorough and proactive in their examinations. Consumer protection is a top priority the current administration and congress. Fair lending, CRA and HMDA are going to be the regulators tools of choice. Bankers need to be aware of the regulators intent and be prepared to address any lending disparities before the examination. Don't get caught unprepared. The risks are just too great.
Posted by Julie Nance on Fri, May 14, 2010 @ 08:00 AM
Additional Risk Factors and Additional Statistical Analyses
It is no longer business as usual for institutions that engage in mortgage lending or servicing, or non-banks that engage in equity lending or other forms of lending. The risks are greater than they've ever been. With broadened government oversight and increasingly complex regulations, lenders could find themselves like deer in headlights if they are not prepared through self assessments, and increased diligence in understanding all the criteria used in every loan file.
In our previous blog, we discussed the Department of Justice's announcement that it has formed a special Fair Lending Unit to pursue residential lenders and brokers that engage in what the government calls "toxic and discriminatory" loans to the minority community. They outline "reverse redlining", the practice of offering products and terms that result in higher foreclosures, as a major focus
of the investigative unit. Loan modifications will also get scrutiny that used to be reserved for primary loans. The DOJ's Fair Lending Unit will also review Home Affordable Modification Program data for signs of discrimination in modification terms and payment reductions.
Revised Procedures
Adding to the complexity for lenders are the revised FFIEC Interagency Fair Lending examination procedures announced in August 2009. The notice clarifies examination procedures related to pricing, steering, redlining, and broker activity. They also provide regulators with guidance on how to evaluate portfolios with small sample sizes and data accuracy. Here's what to expect in your next examination:
Pricing Discrimination - Examiners are directed to look at financial incentives such as overages, underages and yield spread premiums, where broad pricing discretion was used. New procedures increase analysis on pricing and incentives. The procedures also create a new pricing risk factor for disparities in the incidence or volume of higher priced lending among prohibited basis groups.
Steering - The Steering risk factors have been expanded to look at products, terms, conditions, and lending channels, especially as they may create disparity among minority classes. Examiners have been granted increased flexibility to broadly assess whether there is a risk that applicants might be steered to products or channels with potentially negative consequences.
Redlining - The procedures expand the redlining section to include "reverse redlining," where minority neighborhoods may have been targeted for credi
t on less favorable terms than offered in non-minority neighborhoods. A new FFIEC risk factor has been added to identify disparity in the number of originations of higher-priced loans, or loans with potentially negative consequences, in areas with relatively high concentrations of minority residents relative to other areas.
An additional redlining risk factor was added to determine if an institution's CRA assessment area may have been drawn to exclude areas with higher than average concentrations of minority residents.
Broker Activity - New procedures place increased emphasis on understanding an institution's mortgage broker activity when scoping an examination. Examiners are directed to evaluate fair lending with regard to underwriting, terms and conditions, redlining and steering.
Focal Points with Small Sample Sizes - In the past, institutions with low lending volumes or small sample sizes were often disregarded. The new risk factors, however, encourage examiners to pursue further investigation if risk factors are present, regardless of sample size.
Data Accuracy - Under the new procedures, examiners are directed to validate data before conducting the fair lending examinations....especially HMDA data.
Beware Broader Regulatory Analyses
So with these new areas of emphasis, how do you adequately prepare for your Fair Lending exam? The regulatory agencies will be employing specialized techniques, including statistical analysis, regression analysis to evaluate underwriting, steering and pricing matters. The Fair Lending Enforcement Section within DCCA now has responsibility for supporting the HMDA Analysis Program and for developing tailored statistical analyses. Additionally, the Fair Lending Enforcement Section has developed supplemental statistical analyses for redlining matters, and will support examiners with comparative file reviews, even in low volume institutions.
Reduce Risk with Proactive Steps
Due to the Home Affordable Modification Program (HAMP), an increasingly important part of fair lending compliance is loan modifications. Banks and servicers must have set criteria you are using across the board equally. There will be a need to test the impact of these modifications across groups to understand if there is any disparate impact. Understand any disparity that is showing. Redress your program to ensure you are eliminating issues before examiners arrive.
In other words..."know your data." We know you've heard that before, but with added oversight to lending, foreclosures, modifications and workouts, it is more important than ever that you understand the differences in loan outcomes between different classes of borrowers. One of the most proactive and effective steps you can take is to measure, test, and measure again. Even the government suggests that institutions conduct self evaluations. Their procedures imply that the institutions that self test and monitor should be in better standing and better prepared.
What we know is regulators will have new methodologies they use to scrutinize these loans. You should look at your data for evidence of disparate treatment, disparate impact and discrimination. The agencies are going to be more aggressive in their determinations and enforcement. Within this environment, lenders and servicers must continue to mitigate risk for their institutions, meet consumer needs fairly and be prepared for the regulators heightened enforcement activity.
We invite your comments and feedback on this blog. Do you have insights into what changed in your most recent examination? If so, please share with our readers, so we can all benefit from your knowledge.
And let us know what you'd like to see discussed and highlighted in future columns. Feel free to tell us what is most on your mind. We want to contribute to making our readers a little better prepared every time they visit TruPoint Partners' Smart ComplianceTM Blog. And there are no better experts than those of you managing your institutions day to day, through challenging operations and examinations.
Until next time,
TruPoint Partners
Posted by Julie Nance on Tue, May 04, 2010 @ 10:35 AM
Hello and welcome to TruPoint Partner's
first Smart ComplianceTM Blog. At TruPoint our goal is to keep compliance officers and senior management at banks, credit unions and mortgage companies up to date with the latest news around
Community Reinvestment Act, Home Mortgage Disclosure Act, Gramm Leach Bliley Act and Fair Lending. The past two years have been tumultuous and we know what institutions are going through trying to survive increased scrutiny by regulators and the public, while adjusting to a far less profitable business climate. Some compliance officers have even shared with us that it has become painful to go to work every day.
Well, we don't like pain any more than the next guy, so we've made it our mission to find easier ways to meet all the requirements pulling you in different directions, with less effort and less cost. We call it Smart ComplianceTM. And since we're all in this together, we've created our blog to share breaking news and deeper insights into those regulations and Washington moves that may impact your ability to operate with less risk in the areas of CRA, HMDA, GLBA and Fair Lending.
Each week the experts here at TruPoint Partners will make sure you get the latest scoop on the ins and outs of regulation and policies that could affect your institution. We want to make it less stressful, and yes, less painful to do your job in compliance. The Smart ComplianceTM Blog will give you the facts you need, doused with a little insight, so you can proactively prepare your institution for any changes coming your way. And occasionally, we will have guest bloggers that have a unique perspective to offer. So you don't want to miss a post.
For instance, a few short weeks ago the Department of Justice announced it was forming a special Fair Lending Unit to pursue residential lenders and brokers that engage in what the government calls "toxic and discriminatory" loans. Thomas Perez, the DOJ assistant secretary said the new Fair Lending Unit "will pursue cases of reverse redlining - where predatory lenders have targeted toxic products to minority communities, resulting in unprecedented numbers of foreclosures and the resulting disinvestment and blight." They will also review Home Affordable Modification Program data for signs of discrimination in modifications and appropriate monthly payment reductions.
So how could this new enforcement unit affect your business? That is one of the subjects that our blog will explore over the next few weeks. We'll also look at the revisions to Fair Lending and what examiners will be looking for during your next review. And we'll update you on new discussions around the proposed Consumer Protection Agency.
So, add our RSS feed to your online reader or bookmark this blog so you never miss a post. We've even made it easy for you to forward this to your colleagues that may have an interest.
We put the word "Partners" in our name because that is what we want to be for you- a trusted business partner. We invite your comments and feedback on this blog-and what you'd like to see discussed and highlighted in future columns. Feel free to tell us what is most on your mind, because we want this to be a source of open information and knowledge sharing that makes us all a little better prepared every time we read it. And there are no better experts than those of you managing your institutions day to day, through challenging operations and examinations.
Until next time,
TruPoint Partners