Fair Lending and HMDA

Fair Lending and HMDA Quilty & Associates March 4, 2011

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

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 FrameworkEqual Credit Opportunity Act (ECOA) and Regulation B • Purpose is to promote the availability of credit to all creditworthy applicants without regard to: • Race • Color • Religion • National origin • Sex • Marital status • Age • The fact that all or part of the applicant's income derives from a public assistance program • The 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 FrameworkEqual 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; Quilty & Associates 03/04/2011

Fair Lending Regulatory FrameworkEqual Credit Opportunity Act (ECOA) and Regulation B • 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 Fair Housing Act (FH Act) • 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. Quilty & Associates 03/04/2011

Fair Lending Regulatory FrameworkHome 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. Quilty & Associates 03/04/2011

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 Guidelines Table 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 GuidelinesTable 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 GuidelinesTable 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 Examination Quilty & 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 Quilty & Associates 03/04/2011

Overview • HMDA Survival Steps • Common Error Trends Quilty & Associates 03/04/2011

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. Step 1: Identify an employee who will be responsible for overall HMDA quality Quilty & Associates 03/04/2011

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 Step 2: Write HMDA policy and procedures Quilty & Associates 03/04/2011

HMDA Survival Steps HMDA Reportable Loans: • Purchase, home improvement or refinancing of a loan secured by a “dwelling” • HELOCs are optional • Commercial loans may be reportable • Unsecured home improvement loans may be reportable • Pre-Approvals may be reportable Step 3: Identify the HMDA reportable loans Quilty & Associates 03/04/2011

HMDA Survival Steps 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. Step 3: Identify the HMDA reportable loans Quilty & Associates 03/04/2011

HMDA Survival Steps 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. Step 3: Identify the HMDA reportable loans Quilty & Associates 03/04/2011

HMDA Survival Steps Not HMDA Reportable: • Land loans • Temporary financing • Pre-qualifications • Loans where credit decision was made by another institution • Refer to HMDA Guide to Getting It Right for a complete list Step 3: Identify the HMDA reportable loans Quilty & Associates 03/04/2011

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? Step 3: Identify the HMDA reportable loans Quilty & Associates 03/04/2011

HMDA Survival Steps • Choose random sample of loans to test • Review 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 Step 4: Review HMDA reportable loans for data integrity 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 Step 5: React to the error trends! Quilty & Associates 03/04/2011

HMDA Survival Steps Step 6: Don’t Forget HMDA Disclosure Requirements • 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) Step 6: Don’t Forget HMDA Disclosure Requirements Quilty & Associates 03/04/2011

HMDA Survival Steps Step 6: Don’t Forget HMDA Disclosure Requirements • FFIEC posts reports @ www.ffiec.gov by institution, which comprises an institution’s “Disclosure Statement” • Disclosure statement must be made available to the public within 3 days of posting to the internet • Must be available for 5 years Quilty & Associates 03/04/2011

Common HMDA Error Trends Error Trend: Action Taken Type is Wrong • High error rate!! • HMDA Codes not consistent with industry lingo • Code 1: Loan Originated • Code 2: Approved Not Accepted • Code 3: Denied • Code 4: Applicant Expressly Withdrew • Code 5: File Closed for Incompleteness • Code 6: Loan Purchased by Your Institution • Code 7: Preapproval Request Denied • Code 8: Preapproval Request Approved but not accepted (optional reporting) Quilty & Associates 03/04/2011

Error Trend: Action Taken Type is Wrong • Solution: React with ECOA Training and Controls • Notification requirements within 30 days of a receiving a completed application: • 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 • Loan is Incomplete • Must send “Regulation B Compliant” Notice of Incomplete Application • Loan is Denied • Loan is Approved Quilty & Associates 03/04/2011

Common HMDA Error Trends Error Trend: Loan Amount is Wrong for Denied/Withdrawn Loans • Unexplained loan amount changes • 1/1/2010 RESPA Changes • Counteroffer loans • May result in different action taken type Quilty & Associates 03/04/2011

Common HMDA Error Trends Error Trend: Application Received Date is Not Supported In the File • 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 Quilty & Associates 03/04/2011

Common HMDA Error Trends Error Trend: Loan Purpose • Pecking order: Purchase, then home improvement, then refinance • Multiple purpose loans • Insufficient detail in file for cash out • Review purpose codes: any home improvement? Quilty & Associates 03/04/2011

Common HMDA Error Trends Error Trend: Government Monitoring Information (“GMI”) • 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

Common HMDA Error Trends Error Trend: Government Monitoring Information (“GMI”) • 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. Quilty & Associates 03/04/2011

Common HMDA Error Trends Error Trend: Identifying reportable loans: Investor/Broker • 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 Quilty & Associates 03/04/2011

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 • 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. Quilty & Associates 03/04/2011

Questions? Quilty & Associates 03/04/2011

Fair Lending and HMDA