quilty & associates march 4, 2011 fair lending and hmda

Quilty & Associates

March 4, 2011

Fair Lending and HMDA

Agenda

Fair Lending Overview

HMDA Data Integrity

Changes on the Horizon

Quilty & Associates 03/04/2011

Fair Lending Overview

Fair Lending Regulatory Framework

Types of Lending Discrimination

Federal Financial Institutions Examination Council (“FFIEC”) Fair Lending Examination Guidelines




Equal Credit Opportunity Act (ECOA) and Regulation B

Fair Housing Act (FH Act)

Home Mortgage Disclosure Act (HMDA) and Regulation C




Purpose is to promote the availability of credit to all creditworthy applicants without regard to:

RaceColorReligionNational originSexMarital statusAge The fact that all or part of the applicant's income derives

from a public assistance programThe fact that the applicant has in good faith exercised any

right under the Consumer Credit Protection Act.




The regulation prohibits creditor practices that discriminate on the basis of any of these factors.

The regulation also requires creditors to notify applicants of action taken on their applications;

To retain records of credit applications;

To collect Government Monitoring Information (“GMI”): information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans;

For applicants to indicate whether they intend to apply for joint credit;

And to provide applicants with copies of appraisal reports used in connection with credit transactions.





Prohibits housing discrimination on the basis of race, color, religion, sex, disability, familial status, and national origin.

It is unlawful to discriminate in any aspect of selling or renting housing or to deny a dwelling to a buyer or renter because of the disability of that individual, an individual associated with the buyer or renter, or an individual who intends to live in the residence.


Fair Housing Act (FH Act)



Home Mortgage Disclosure Act (HMDA) and Regulation C

To provide the public with information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are located;

Financial institutions and lenders are required to submit a report annually which includes 26 data fields for every reportable loan

Data is used during Fair Lending examinations to identify discriminatory lending patterns.



Overt evidence of disparate treatment

Comparative evidence of disparate treatment

Evidence of disparate impact



Overt Evidence of Disparate Treatment

The lender openly discriminates on a prohibited basis.For example, refusing to grant credit to applicants

over 65.



Comparative Evidence of Disparate Treatment

The lender treats an applicant differently based on one of the prohibited bases.

It does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate beyond the difference in treatment itself.

It is considered to be discrimination by courts to be intentional discrimination because no credible, non-discriminatory reason explains the difference in treatment of a prohibited basis.



Comparative Evidence of Disparate Treatment (cont.)

Example: A non-minority couple applies for a loan. They have adverse information on their credit report, and the lender assists them in correcting inaccurate information in the report in order to get the loan. A minority couple in the same situation is denied for the loan based on the negative credit report without giving the couple an opportunity to discuss the report.


Types of Lending Discrimination Evidence of Disparate Impact

When a lender applies a practice equally to all applicants, but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a “disparate impact”.

When an Agency finds that a lender’s policy or practice has a disparate impact, the next step is to determine whether the policy or practice is justified by “business necessity”. This business necessity may not be hypothetical or speculative. Cost or profitability could be relevant factors.

Example: A lender does not extend loans for less than $60,000. This minimum loan amount policy disproportionately excludes potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live.

FFIEC Fair Lending Examination Guidelines

A Fair Lending MUST READ

Guidelines can be found at: www.ffiec.gov/pdf/fairlendpdf

Perfect Senior Management Fair Lending training tool


Fair Lending Examination GuidelinesTable of Contents

Part I: Examination Scope Guidelines

Step One – Develop an Overview

Step Two - Identify Compliance Program Discrimination Risk Factors

Step Three - Review Residential Loan Products

Step Four - Identify Residential Lending Discrimination Risk Factors

Step Five - Organize and Focus Residential Risk Analysis

Step Six - Identify Consumer Lending Discrimination Risk Factors

Step Seven – Identify Commercial Lending Discrimination Risk Factors

Step Eight - Complete the Scoping Process Quilty & Associates 03/04/2011

Fair Lending Examination Guidelines

Table of Contents

PART II - COMPLIANCE MANAGEMENT REVIEW

PART III - EXAMINATION PROCEDURES

A. Verify Accuracy of Data

B. Documenting Overt Evidence of Disparate Treatment

C. Transactional Underwriting Analysis - Residential and Consumer Loans

D. Analyzing Potential Disparities in Pricing and Other Terms and Conditions

E. Steering Analysis

F. Transactional Underwriting Analysis - Commercial Loans

G. Analysis of Potential Discriminatory “Redlining”

H. Analysis of Potential Discriminatory Marketing Practices

I. Credit Scoring

J. Disparate Impact Issues Quilty & Associates 03/04/2011

Fair Lending Examination Guidelines

Table of Contents

PART IV - OBTAINING AND EVALUATING RESPONSES FROM

THE INSTITUTION AND CONCLUDING THE EXAMINATION

APPENDIX

I. Compliance Management Analysis Checklist

II. Considering Automated Underwriting and Credit Scoring

III. Evaluating Responses to Evidence of Disparate Treatment

IV. Fair Lending Sample Size Tables

V. Identifying Marginal Transactions

VI. Potential Scoping Information

VII. Special Analyses

VIII. Using Self-Tests and Self-Evaluations to Streamline the ExaminationQuilty & Associates 03/04/2011

HMDA


Why the “Compliance Report Card”?

HMDA data collection requirements from application through post-closing

HMDA data integrity trends point to weaknesses in compliance overall

Quarterly review of LAR: perfect opportunity to monitor performance

Overview


1. HMDA Survival Steps

2. Common Error Trends

HMDA Survival Steps


Must have an understanding of residential compliance requirements

Loan Officers and Operations staff should share HMDA responsibilities

An officer of the institution must monitor HMDA reporting throughout the year, and must certify to its accuracy at year-end.

HMDA Survival Steps


Provide detailed guidance for each of the 26 data fields on the Loan Application Register (“LAR”)

Procedures should reflect LOS functionality

Consider using a HMDA checklist in each file

Should be a custom “HMDA Guide to Getting It Right” for your institution

HMDA Survival Steps


HMDA Reportable Loans:

Purchase, home improvement or refinancing of a loan secured by a “dwelling”

HELOCs are optionalCommercial loans may be reportableUnsecured home improvement loans may be

reportablePre-Approvals may be reportable



Investor/Broker Rule

Broker Definition: An institution that takes and processes an application and arranges for another institution to acquire the loan at or after closing.

Investor Definition: An institution that acquires a loan from a broker at or after closing.

HMDA Survival Steps



If a broker sends an application to an investor for underwriting prior to closing, the investor reports the loan.

If a broker does not send the application to the investor for underwriting prior to closing, the broker reports the loan.

HMDA Survival Steps


Not HMDA Reportable:

Land loansTemporary financingPre-qualificationsLoans where credit decision was made by another institutionRefer to HMDA Guide to Getting It Right for a complete

list

HMDA Survival Steps


Run Loan Production reports off the LOS for the calendar year for all HMDA reportable products

Run reports for all types of action taken

Include Loans In Process in your scope

Is the Pipeline Management up to date?Has ECOA notification been provided?

HMDA Survival Steps


HMDA Survival Steps

Choose random sample of loans to testReview larger sample of denied/withdrawn loans

Compare loan file to the actual LAR or HMDA export file for each of the 26 data fields

Retain audit work papers to document the file review

Expand scope if significant error rate is identified


HMDA Survival Steps

Analyze the error trends: find the source of the problem

SHARE THE INFORMATION!

Strengthen Internal Controls

TRAIN, TRAIN, TRAIN!!

Revise HMDA procedures if necessary


HMDA Survival Steps

• HMDA Poster must be displayed in the lobby of home office and each branch office

• Display in a prominent location


HMDA Survival Steps

Modified LAR must be made available to the public within 30 days for requests made after March 1

Must delete application number, application received date and action taken date to protect member privacy

Modified LAR must be available for 3 years

Train your staff (branch managers, CSRs)


HMDA Survival Steps

FFIEC posts reports @

www.ffiec.gov by institution, which comprises aninstitution’s “Disclosure Statement” Disclosure statementmust be made availableto the public within 3 days ofposting to the internet Must be available for 5 years

Common HMDA Error Trends


High error rate!!

HMDA Codes not consistent with industry lingo

Code 1: Loan OriginatedCode 2: Approved Not AcceptedCode 3: DeniedCode 4: Applicant Expressly WithdrewCode 5: File Closed for IncompletenessCode 6: Loan Purchased by Your InstitutionCode 7: Preapproval Request DeniedCode 8: Preapproval Request Approved but not

accepted (optional reporting)


Notification requirements within 30 days of a receiving a completed application:

1. Applicant expressly withdraws

CAUTION: File must be documented Do not use this action taken for applicants who do not proceed

with the GFE unless the applicant expressly withdrew

2. Loan is Incomplete

Must send “Regulation B Compliant” Notice of Incomplete Application

3. Loan is Denied4. Loan is Approved



Unexplained loan amount changes

1/1/2010 RESPA Changes

Counteroffer loans

May result in different action taken type



Is the date consistent with other application documents?

Where there’s smoke, there’s fire.

Consistent problems with documenting application received date may point to general lack of understanding

Is it time for training: When does an inquiry become an application?

Be consistent by application channel: internet, face to face, etc.

Review procedures for each loan product



Pecking order: Purchase, then home improvement, then refinance

Multiple purpose loans

Insufficient detail in file for cash out

Review purpose codes: any home improvement?



If the application is taken face to face, the applicant completes the GMI box.

If they indicate “I do not wish to furnish”, you must complete the ethnicity, race and sex by visual observation AND note “By visual observation” on the application!


If the application is taken by mail or on-line, the applicant fills out the GMI section. The information should not be altered or edited by the loan officer.

If the application is taken by phone, the loan officer must read the text in the GMI section and note what the applicant provides. The information should not be altered or edited by the loan officer.



Not the same meaning in the industry

Institution making the credit decision reports the loan

If a Broker sends the file to an Investor for underwriting prior to closing, the Investor reports that loan, not the Broker – whether the loan closes or not.

Reporting tied to credit decision, not to source of funds


HMDA Changes on the Horizon

Dodd-Frank Act includes change to the data collected and reported under HMDA.

Additional fields to be reported are:

Applicant’s age Total points and fees

Prepayment penalty term Collateral value

Teaser period Non-fully amortizing payment feature

Loan term Origination channel

Property parcel number Applicant credit scores

SAFE Act originator ID Universal loan identifier

APR for loan and benchmark test


HMDA Changes on the Horizon


• Dodd Frank clearly intends to intensify the focus on Fair Lending.

• All oversight activities will be consolidated within one division of the newly created Bureau for Consumer Financial Protection, and the Bureau will have additional data under HMDA to support its analyses.

• The availability of new data under HMDA and increase in regulatory scrutiny will necessitate a refreshed assessment of fair lending compliance programs.

Questions?


quilty & associates march 4, 2011 fair lending and hmda

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