Quilty & Associates March 4, 2011 Fair Lending and HMDA.
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Transcript of 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
Quilty & Associates 03/04/2011
Quilty & Associates 03/04/2011
Fair Lending Regulatory Framework
Equal Credit Opportunity Act (ECOA) and Regulation B
Fair Housing Act (FH Act)
Home Mortgage Disclosure Act (HMDA) and Regulation C
Quilty & Associates 03/04/2011
Fair Lending Regulatory Framework
Equal Credit Opportunity Act (ECOA) and Regulation B
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.
Quilty & Associates 03/04/2011
Fair Lending Regulatory Framework
Equal Credit Opportunity Act (ECOA) and Regulation B
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.
Quilty & Associates 03/04/2011
Fair Lending Regulatory Framework
Equal Credit Opportunity Act (ECOA) and Regulation B
Quilty & Associates 03/04/2011
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 Lending Regulatory Framework
Fair Housing Act (FH Act)
Quilty & Associates 03/04/2011
Fair Lending Regulatory Framework
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.
Quilty & Associates 03/04/2011
Types of Lending Discrimination
Overt evidence of disparate treatment
Comparative evidence of disparate treatment
Evidence of disparate impact
Quilty & Associates 03/04/2011
Types of Lending Discrimination
Overt Evidence of Disparate Treatment
The lender openly discriminates on a prohibited basis.For example, refusing to grant credit to applicants
over 65.
Quilty & Associates 03/04/2011
Types of Lending Discrimination
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.
Quilty & Associates 03/04/2011
Types of Lending Discrimination
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.
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
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1. HMDA Survival Steps
2. Common Error Trends
HMDA Survival Steps
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
HMDA Reportable Loans:
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
Quilty & Associates 03/04/2011
HMDA Reportable Loans:
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
HMDA Survival Steps
• HMDA Poster must be displayed in the lobby of home office and each branch office
• Display in a prominent location
Quilty & Associates 03/04/2011
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)
Quilty & Associates 03/04/2011
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
Quilty & Associates 03/04/2011
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)
Quilty & Associates 03/04/2011
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
Common HMDA Error Trends
Quilty & Associates 03/04/2011
Unexplained loan amount changes
1/1/2010 RESPA Changes
Counteroffer loans
May result in different action taken type
Common HMDA Error Trends
Quilty & Associates 03/04/2011
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
Common HMDA Error Trends
Quilty & Associates 03/04/2011
Pecking order: Purchase, then home improvement, then refinance
Multiple purpose loans
Insufficient detail in file for cash out
Review purpose codes: any home improvement?
Common HMDA Error Trends
Quilty & Associates 03/04/2011
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!
Quilty & Associates 03/04/2011
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.
Common HMDA Error Trends
Quilty & Associates 03/04/2011
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
Common HMDA Error Trends
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
Quilty & Associates 03/04/2011
HMDA Changes on the Horizon
Quilty & Associates 03/04/2011
• 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 03/04/2011