Post on 07-Apr-2020
transcript
Fair Lending Analysis Made Easy
Presented by: Ian DunnCEO,
Agenda
The Basics
Assessing Your Potential Fair Lending Risk Exposure
Key Fair Lending Analysis & Reporting3
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The Basics- Fair Lending Laws and Prohibited Basis Groups
Fair Housing Act (FH Act)Prohibits discrimination in residential real estate transactions:
-making loans to buy, build, repair, improve a dwelling-purchasing real estate loans-selling, brokering, or appraising residential real estate-selling or renting a dwelling
Equal Credit Opportunity Act (ECOA)Prohibits discrimination in any aspect of a credit transaction
Reg B, HMDA, and CRA
Then Basics-Fair Lending Laws and Prohibited Basis Groups
Race/Color
Religion
Gender
Age
Marital Status
Source of Income
National Origin
Handicap
Familial Status
Both ECOA FH Act
The Basics- Types of Discrimination
Disparate Treatment>Overt-Lender openly discriminates on a prohibited basis (can be written or verbal)
>Comparative Evidence-Differences in treatment not fully explained by legitimate non-discriminatory factors
*A disparate treatment claim does not require evidence the lender intended to discriminate or was motivated by prejudice.
Disparate Impact (“Effects Test”)>When an otherwise neutral policy or practice has a disproportionately negative impact on persons from a prohibited basis group.
*A disparate impact claim must show the challenged policy or practice is either:1) not justified by a valid business propose or 2) that the business justification could be accomplished using a less discriminatory alternative.
Applies to: Applicants Associations Occupants Neighborhood
The Basics- Prohibited PracticesFail to provide or provide different information or services regarding any aspect of the lending process
Discourage or selectively encourage individuals who inquire or apply for credit
Refuse to extend credit or use different standards in determining whether to extend credit
Vary the terms of credit offered
Use different standards to evaluate collateral
Treat a borrower differently in servicing a loan or making invoking default remedies
Use different standards for pooling or packaging loans in the secondary market
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The Basics- Fair Lending touches every part of Lending Process
Application Activities-Level of Assistance-Use of 3rd Parties-Initial Terms & Conditions
Pre-Application Activities-Advertising & Market Selection-Channels-Responding to Inquiries
Underwriting/Closing-Approval Criteria-Final Terms & Conditions-Appraisal Practices
Servicing/Post-Closing-Modifications-Default Remedies-REO
The Basics-Example 1
-For joint applicants, combine the debts and income of married joint applicants to calculate debt-to-income ratio and for unmarried joint applicants calculate an individual debt-to-income ratio for each applicant.
Discrimination? -Yes!
Prohibited Basis: -Marital Status
Discrimination Type: -Disparate Treatment: Overt
Prohibited Practice:-Refuse to extend credit or use different standards (married vs. unmarried) in determining
whether to extend credit
The Basics-Example 2
Discrimination? -Potentially
Prohibited Basis: -National Origin
Discrimination Type: -Disparate Treatment: Comparative Evidence
Prohibited Practice:-Vary the terms of credit offered
Borrower National Origin Number of Home Purchase Loans Average Interest RateHispanic 125 12.5%
Non Hispanic White 150 8.5%
The Basics-Example 3The financial institution has a policy not to make home loans less than $100,000.
Discrimination? -Potentially
Prohibited Basis: -Race, Familial or Marital Status
Discrimination Type: -Disparate Impact
Prohibited Practice:-Fail to provide services, discourage applications
Notes:-Does this policy effectively exclude certain low income and/or minority majority areas?-Does the $100k min. policy have a legitimate business need? Can that need be satisfied in a less discriminatory manner?
The Basics-Example 4Discrimination?
-PotentiallyProhibited Basis:
-Race, Familial or Marital StatusDiscrimination Type:
-Disparate ImpactProhibited Practice:
-Fail to provide services, discourage applicationsNotes:-With few exceptions, there are no compliance
requirements to advertise in a foreign language-Are all triggers/key terms/disclosures also in the
foreign language?
Agenda
The Basics
Assessing Your Potential Fair Lending Risk Exposure
Key Fair Lending Analysis & Reporting3
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Marketing Activities
Discretion Permitted
Exception Handling
Use of Third Parties
How and where you offer credit products are not just
fundamental business decisions, they have fair lending implications as
well.
The level of individual discretion permitted in
certain activities such as approvals or pricing
increases an institution’s fair lending risk.
Exceptions should be made consistently for similar
reasons for similarly situated applicants or borrowers.
From a fair lending perspective TPOs are the financial
institution and if any TPO does not comply with fair lending
regulations the financial institution may be as culpable
as if you were the initial creditor.
Incentives & Compensation
Compensation tied to loan production can be a
great motivator for a tough job, but it can also
lead to significant fair lending issues.
Assessing Your Potential Fair Lending Risk Exposure
Redlining
The illegal practice of refusing to make loans or imposing more onerous terms on borrowers because of the racial, national origin, or other prohibited basis characteristics of the residents of a subject neighborhood.
Reverse Redlining
Reverse redlining is the deliberate targeting of residents of such neighborhoods with less advantageous or potentially predatory products.
Marketing ActivitiesFigure 1. Home Owner’s Loan Corporation, Philadelphia, PA., 1936
Evans Bank (NY): https://www.youtube.com/watch?v=nZix2Joay-0
The Department of Justice (DOJ) recently settled two redlining cases: one against Citizens Bank of Flint, Michigan and one against Midwest BankCentre of St. Louis County, Missouri.
Steering
The guiding of an applicant or a borrower to a less advantageous product on a prohibited basis rather than on the legitimate needs.
(Steering in Real Estate refers to guiding a prospective purchaser towards or away from certain neighborhoods based on race.)
Marketing Activities
Marketing Activities
Advertising/Pre-screening
Advertising methods that could discourage individuals from applying for loans or in media that exclude specific regions are sources of fair lending risk.
1 (Low) 2 3 4 5 (High)
Market Demographics:Stable, Low Competition, Low Diversity Evolving, High Competition, High Diversity
Delivery Channels:Limited, Processes don’t vary, No Subprime Subsidiaries/Affiliates
Multiple, Processes vary, Subprime Subsidiaries/Affiliates
Product Complexity:Traditional MixNew Products Reviewed for Fair Lending Compliance
Complex and Non-traditional MixNew Products Not Reviewed
Advertising:Limited, No Recent Changes, Broad Based Extensive, Constantly Changing, Targeted
Score:
Marketing Activities (Score 1 to 5)
Discretion Permitted
The lawsuit alleges that SunTrust's policies promoted racial discrimination by giving loan officers and mortgage brokers significant discretion to vary a loan's interest rate and other fees from the prices the company set based on a borrower's creditworthiness.In 2009, new SunTrust Mortgage policies reduced the discretion of loan officers and mortgage brokers to alter prices. The company also now requires variations in prices to be documented and reviewed by a supervisor.
SunTrust Mortgage Inc. has agreed to pay $21 million Settlement
Discretion Permitted (Score from 1 to 5)
Score:
How much discretion is permitted? Does the degree of permitted discretion vary by geography, channel, or activity? Can the exercise of discretion impact compensation?
1 (Low) 2 3 4 5 (High)
Limited and Consistent Discretion Broad and Variable Discretion
Discretion Criteria is Clear Discretion Criteria is Broad or Non-existent
Discretion Does Not Impact Compensation Discretion Does Impact Compensation
Exception Handling
Score:
Is file documentation accurate and descriptive? Is rationale objective? Are exceptions low in number? Do certain loan officers, branches, etc. have a higher level of granting exceptions?
1 (Low) 2 3 4 5 (High)
Exceptions are Objective and Well Documented Exceptions are Subjective and Not Well Documented
Exceptions are Few in Number Exceptions are Many
Exception Handling (Score from 1 to 5)
Consumer
Dealer
Lender(s)
DealerConsumer
Dealer
Lender
1. Consumer submits application to Dealer
2. Dealer submits application to Lender(s)
3. Lender(s) submit “buy rate” and dealer compensation to dealer
4. Dealer sets actual rate to consumer
5. Consumer and Dealer close the sale
Lender(s) Lender(s)
6. Dealer sales the contract to the chosen Lender
Q: Where is a major source of Fair Lending Risk in this process?
Use of Third Parties
Score:
Do you use Third Party Operators (TPOs)? Is due diligence performed? Do you have written agreements addressing fair lending obligations? Do agreements define who is responsible and accountable? Do you receive regular reporting? Does the TPO have frequent complaints? Does the TPO conduct fair lending training?
1 (Low) 2 3 4 5 (High)
Little or No Use of Third Parties Extensive Use of Third Parties
Due Diligence Performed No Due Diligence Performed
Written Agreements/Accountability Defined No Written Agreements/Accountability Not Defined
Receive Regular Reporting Receive No Reporting
Regular Fair Lending Training No Fair Lending Training
Use of Third Parties (Score from 1 to 5)
Incentives & Compensation
https://www.youtube.com/watch?v=t-W_ilJqt4A
Bank of America $335 Million Settlement “Compensation structure was such that a (loan officer) would make more money if they put people into a poor quality, higher priced loans.”
Lisa Madigan, Attorney General, Illinois
Incentives & Compensation (Score from 1 to 5)
Score:
Are your loan officer and other decision makers compensated on loan production? Is compensation tied to higher pricing or higher fees?
1 (Low) 2 3 4 5 (High)
Incentives & Compensation Not Tied to Loan Production
Incentives & Compensation Tied to Loan Production
Incentives & Compensation Not Tied to Loan Pricing and/or Fees
Incentives & Compensation Tied to Loan Pricing and/or Fees
Assessing Your Potential Fair Lending Risk Exposure
Source Score
-Marketing Activities (1-5)
Discretion Permitted (1-5)
Exception Handling (1-5)
Use of Third Parties (1-5)
Incentives & Compensation (1-5)
TOTAL SCORE (5-25)
RISK LEVEL (Low to High)
Low Medium-Low Medium Medium-High High
<=7 8-12 13-16 17-21 >=22
What is your total score and risk level?
Risk Level (Based on Total Score):
Incentives & Compensation
Discretion Permitted
Discrepancies by Prohibited Basis Groups
=HIGH RISK!!!
Does statistical analysis show higher rates/fees being charged to minorities
or other prohibited basis groups?
Is compensation tied to higher priced loans?
Can loan officers or other decision makers set rates
and fees?
Agenda
The Basics
Assessing Your Potential Fair Lending Risk Exposure
Key Fair Lending Analysis & Reporting
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Self Evaluation vs. Self TestA self evaluation or a self test may provide for a streamlined exam.
Self Evaluation Self Test
Essentially any fair lending analysis of loan and application data that is not a “self test”.
Examples: -Comparative File Reviews-Statistical Audit/Reports
Any voluntary program, practice, or study that is designed and specifically used to assess an institution’s compliance with fair lending laws and creates data not available or derived from loan, application, or other records related to a credit transaction.
Examples-Paired Testing-Surveys
“Likely” violations require “Appropriate Corrective Action”
Appropriate Self-Testing can create legal privilege.
Consult your legal counsel!
Fair Lending Basic Building Blocks
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Demographics of your Institution’s “Lending Area”.
Demographics of the Census Tract where each applicant/borrower resides.
Applicant/Borrower data such credit score, DTI, PTI, length of employment, length at residence, etc. Also, race, gender, and age of borrower as appropriate.
Application/Loan data such as channel used, decision makers involved , status, rate, term, amounts, etc.
Collateral information such as type and original value.
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Fair Lending Advanced Building Blocks
1 Expected Race
Estimating Expected Race (Bayesian Improved Surname Geocoding-BISG):Step 1. Match Borrower Address to Census Tract
Step 2. Calculate Baseline Expected Race/Ethnicity Using Census Data
Step 3. Match Borrower Surname to Name/Race Database
Step 4. Apply Bayesian Statistics to Update Baseline Expected Race
P(Ethnicity|Given Surname) = P(Given Surname|Ethnicity)*P(Ethnicity)P(Given Surname|Ethnicity)*P(Ethnicity) + P(Given Surname|Not Ethnicity)*P(Not Ethnicity)
Fair Lending Advanced Building Blocks
2 Expected Gender
Estimating Expected Gender:-Match Borrower First Name to Gender Name Database
An Example
2.14(Hispanic)
The 4 Key Fair Lending Ratios & Reports
% of PBG in Lending Area / % of PBG in Portfolio
% of PBG in Product /% of Portfolio
% of PBG Denied /Expected % of Denied
Avg. Rate of PBG /Expected Rate of PBG
Redlining Ratio Steering RatioExpected Denial
RatioExpected Pricing
Ratio
2.78(Female)
*PBG is a Prohibited Basis Group such as Race, Gender, Age, Etc.
1.93(HELOC-
Subprime)
1.22(Black)
2.14(Hispanic)
% of PBG in Lending Area / % of PBG in Portfolio
Redlining Ratio
*PBG is a Prohibited Basis Group such as Race, Gender, Age, Etc.
Percent of Applications
(or Loans) Percent of Lending
Area Redlining RatioAsian/Pacific
Islander3.0% 2.5% 0.83
Black 7.0% 7.5% 1.07
Hispanic 14.0% 30.0% 2.14
Native American 1.0% 1.0% 1.00
White 70.0% 55.0% 0.79
Other/Not Reported
5.0% 4.0% 0.80
% of PBG in Product /% of PBG in Portfolio
Steering Ratio
1.93(HELOC-
Subprime)
*PBG is a Prohibited Basis Group such as Race, Gender, Age, Etc.
Asian/Pacific Islander Black Hispanic
Native American White Other
First Mortgage 2.0% 7.5% 8.0% N/A 80.5% 2.0%Second Mortgage 1.2% 3.4% 12.2% N/A 82.2% 1.0%
HELOC (Prime) 1.4% 4.5% 5.5% N/A 87.1% 1.5%HELOC (Sub Prime) 1.6% 14.2% 10.6% N/A 72.4% 1.3%
Other 1.7% 0.5% 2.5% N/A 93.6% 1.7%Total 2.0% 7.4% 7.9% N/A 81.3% 1.8%
Asian/Pacific Islander Black Hispanic
Native American White Other
First Mortgage 1.00 1.02 1.01 N/A 0.99 1.10Second Mortgage 0.59 0.46 1.54 N/A 1.01 0.55
HELOC (Prime) 0.69 0.61 0.69 N/A 1.07 0.83HELOC (Sub Prime) 0.78 1.93 1.34 N/A 0.89 0.69
Other 0.83 0.07 0.32 N/A 1.15 0.94
Fair Lending Advanced Building Blocks
Expected Acceptance Rate
Estimating Expected Acceptance Rate (Multiple Regression Analysis):1. Sample Construction
Similar loan types, similar origination periods, large sample size
2. Regression Estimation
Independent Variables: Credit Score, Reference Rate, Loan-to-Value, Etc.
Estimate Variable Coefficients
3. Apply Resulting Coefficients to each loan to estimate Expected Interest Rate
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*PBG is a Prohibited Basis Group such as Race, Gender, Age, Etc.
% of PBG Denied /Expected % PBG Denied
Expected Denial Ratio Gender
All Application
Count
Denied Application
Count% Denied Expected
% DeniedExpected
Denial Ratio
Male 400 10 2.5% 2.7% 0.93
Female 200 50 25.0% 9.0% 2.78
Joint 300 30 10.0% 9.0% 1.1
Unknown 50 0 0% 0% N/A
Not Reported 50 0 0% 0% N/A
TOTAL/OVERALL 1000 90 9.0% 9.0% 1.0
2.78(Female)
Fair Lending Advanced Building Blocks
Expected Interest Rate
Estimating Expected Interest Rate (Multiple Regression Analysis):1. Sample Construction
Similar loan types, similar origination periods, large sample size
2. Regression Estimation
Independent Variables: Credit Score, Reference Rate, Loan-to-Value, Etc.
Estimate Variable Coefficients
3. Apply Resulting Coefficients to each loan to estimate Expected Interest Rate
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Race/Ethnicity Average Rate Average Expected Rate Difference Expected Pricing
Ratio
Asian/Pacific Islander 6.8% 0.97
Black 12.8% 1.22
Hispanic 11.5% 1.02
White 6.0% 1.00
Other 7.0% 1.00
Not Reported 0% 1.00Avg. Rate of PBG /Expected Rate of PBG
Expected Pricing Ratio
*PBG is a Prohibited Basis Group such as Race, Gender, Age, Etc.-Show by: Race, Gender, and Age-Significant differences between average rates and expected rates are an indication of potential disparate treatment-You can also compare “Buy Rates” to “Contract Rates” to see dealer markups
7% 0.2%
10.5% 2.3%
11.3% 0.2%
6.1% 0.1%
7.0% 0.0%
0% 0%
1.22(Black)
Additional Fair Lending Reports
Description Applications Loans
Volumes/Concentrations
Approval/Denial Rates
Disposition (of Applications)
Exception Tracking
Decisionmaker Analysis
Mod/Default Tracking
Volumes/Concentrations
Race All Application Count % of All Applications
Asian/Pacific Islander 50 5%
Black 200 20%
Hispanic 10 0%
White 500 50%
Not Reported 50 5%
-Show by: Race, Gender, and Age-A low volume of applicants/loans may be an indicator of Pre-screening, Redlining, and/or Policies with Disparate Impact
Approval/Denial Rates & Denial Disparity Ratio
Gender All Application Count
Denied ApplicationCount Denial Ratio Denial Disparity Ratio
(by Total*)
Male 400 10 2.5% 0.28
Female 200 50 25% 2.78
Joint 300 30 10% 1.1
Unknown 50 0 0% N/A
Not Reported 50 0 0% N/A
TOTAL/OVERALL 1000 90 9.0% 1.0
-Show by: Race, Gender, and Age-Significant variations in acceptance/denial ratios may be an indicator of disparate treatment
*The Denial Disparity Ratio can also be calculated by comparing to a control group (i.e. Male) instead of the total.
Disposition (of Applications)
AgeAll
Application Count
Approved-Funded
ApplicationCount
Approved-Not Funded
Application Count
Denial Application Count
Withdrawn Application
CountOther
<=20 50 20 0 30 0 0
21-30 100 55 5 40 0 0
31-40 300 290 5 5 0 0
41-50 300 200 20 70 10 0
51-60 125 100 5 12 3 5
>60 100 50 25 0 25 0
-Show by: Race, Gender, and Age-high levels of withdrawn and/or approved-not funded applications may be an indicator of disparate treatment
Exception Tracking
Description% of Asian/Pacific Islander
% of Black % of Hispanic % of White % of Other % of Not Reported
Exception Code A 2% 3% 1% 92% 0% 2%
Exception Code B 1% 4% 3% 90% 0% 2%
Exception Code C 2% 6% 3% 87% 0% 2%
Exception Code D 2% 3% 2% 91% 0% 2%
Exception Code E 2% 3% 5% 90% 0% 0%
Etc. 2% 3% 5% 88% 0% 2%
-Show by: Exception Codes, Descriptions, or Yes/No-Comparatively high concentrations in control groups in certain exception categories are an indication of potential disparate treatment
Decisonmaker Analysis
Description% of Asian/Pacific Islander
% of Black % of Hispanic % of White % of Other % of Not Reported
Loan Officer A 2% 13% 15% 68% 0% 2%
Loan Officer B 2.5% 12.5% 14% 70% 0% 1%
Loan Officer C 1% 13% 16% 69% 0% 1%
Loan Officer D 1% 1% 1% 95% 0% 2%
Loan Officer E 3% 12% 17% 65% 0% 3%
Etc. 2% 13% 11% 70% 0% 4%
-Show by: Loan Officer, Underwriter, Branch, Etc.-Basically any of the above reports (volumes, denial rates, steering, pricing, exception tracking, etc.) stratified by a decision maker (loan officer, underwriter, etc.)
Modifications Tracking
-Modification Rates by Race, Gender, Age, Marital Status, Etc.
-High % of Modification’s Denied are an indication of potential disparate treatment
Description% of Asian/Pacific Islander
% of Black % of Hispanic % of White % of Other % of Not Reported
Modification Granted 2% 1.3% 1.5% 93.2% 0% 2%Modification Denied 2.5% 94.3% 2.2% 2.5% 0% 1%
Tone at The Top
Policies & Procedures
Assessing Fair Lending
Risk
Training
PerformanceMonitoring
Correction
Fair Lending is cultural and reinforced at the highest levels and throughout the organization in both written and verbal forms.
Policies and Procedures provide clear guidance and are free of overt discrimination.
Assess and mitigate, as appropriate, heighted fair lending risk areas.
Training occurs regularly and is well documented. Trainees include top management, board members, and new employees.
Any weaknesses or violations are promptly corrected , including
appropriate restitution.
Fair lending compliance and performance is regularly
reported and monitored.
Bringing it all together…
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Email:info@visibleequity.com
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