Division of Supervision and Consumer Protection

1. HMDA Outlier Fair Lending Project November 16, 2010 Tara L. Oxley, Senior Fair Lending Specialist Lena Patmon, Examination Specialist, Fair Lending Division of Supervision and Consumer Protection

2. HMDA Outlier Fair Lending Project Background • Project began with the review of 2004 Home Mortgage Disclosure Act (HMDA) data to identify institutions with a higher risk of pricing or denial discrimination. • Outlier institutions receive increased scrutiny to determine whether large disparities are due to legitimate pricing/underwriting factors or discrimination. • A very small number of FDIC-supervised banks are identified as Outliers. • A small number of Outliers actually result in discriminatory findings. 2

3. HMDA Outlier Fair Lending Project Identification of Outliers • Fair Lending team of economists rely on bank-reported HMDA data to identify institutions with large pricing and/or denial rate disparities. • Screens compare each FDIC-supervised institution to all other FDIC-supervised institutions. • Screens, for each institution, are run for each product and compare racial/ethnic minorities or female borrowers to non-Hispanic white or male/joint borrowers. • Screens are based on disparities in the: • 1. Incidence of higher-priced loans • 2. Average rate-spread on higher-priced loans • 3. Incidence of HOEPA loans • 4. Percent of denied applications 3

4. HMDA Outlier Fair Lending Project Identification of Outliers • Important Facts to Remember: • HMDA data accuracy is vital. If HMDA data is determined to be invalid, the institution must scrub its LAR and resubmit, normally within 60 days. • Analyzing HMDA higher-priced loans is only a starting point. The real focus of our fair lending review will be the actual note rates and fees charged to all borrowers. • Analysis of interest rates and fees, not APR. 4

5. HMDA Outlier Fair Lending Project The Outlier Review • If your institution is flagged as a HMDA Outlier: • Don’t panic! A large percent of outlier reviews result in • no evidence of discriminatory pricing or underwriting. • Each outlier institution review begins with the institution receiving a notification letter and detailed Information Request from the FDIC. • The Information Request is a targeted request for information about the institution’s credit practices for the specific loan product during the time period under review. • Correct and comprehensive information is vital to the process. Inaccurate or incomplete data or information will only delay the process. 5

6. HMDA Outlier Fair Lending Project The Outlier Review • Criteria Interview (Pricing or Underwriting) • If a statistically significant disparity remains after analysis of the institution’s response to the Information Request, we will conduct an interview with the person who is most knowledgeable about the loan product. • The interview will focus only on the credit policies and practices for the targeted loan product during the review period. • The interviewee will provide the FDIC with the factors considered in pricing or underwriting the targeted loans. • Providing correct and comprehensive information is vital to the analysis. 6

7. HMDA Outlier Fair Lending Project The Outlier Review • Gathering Loan-Specific Data • If the interview identified discretion in any part of pricing (or underwriting), loan-specific data will be gathered for each one of the pricing (or underwriting) factors identified by the institution. • The institution may be asked to provide the loan data in an electronic format. • Or FDIC examiners may come into the institution and perform a manual file review to obtain necessary data. • Where data is not available, it cannot be considered in our analysis. 7

8. HMDA Outlier Fair Lending Project The Outlier Review • Preliminary Regression Analyses • Once the FDIC has the electronic data for each loan in the review, economists conduct statistical analyses of the data. • The analyses will determine if the initial disparity, between the target and control borrowers’ loans, can be explained by those factors identified by the institution during the criteria interview. 8

9. HMDA Outlier Fair Lending Project The Outlier Review • 15-Day Letter • If the analysis continues to identify a statistically significant disparity, after controlling for all factors identified by the bank, the FDIC will present the findings in a “15-Day Letter.” • The 15-Day Letter provides the institution with a detailed summary of our statistical analysis. • The 15-Day Letter gives the institution an opportunity to provide the FDIC with any additional information pertinent to the analysis. 9

10. HMDA Outlier Fair Lending Project Finding of Discriminatory Lending Practices • If, following a review of any additional information provided in the response to the 15-Day Letter, a statistically significant disparity remains between the target and control borrowers’ loans, the FDIC will take the following action: • Cite a violation of fair lending laws and regulations. • Refer the matter to the appropriate federal enforcement authority. 10

11. HMDA Outlier Fair Lending Project How to Lessen Your Chances of Being Flagged as an Outlier - Lessons Learned - • Limit discretion in pricing or underwriting, and ensure that such limited discretion is exercised. • Provide underwriters/loan officers specific written guidance on factors that should be considered when underwriting/pricing loans. • If overages are permitted, understand how such overages are calculated. • Know and understand the lending activities of any affiliates/subsidiaries. • Monitor any areas of discretion or fair lending risk. 11

12. HMDA Outlier Fair Lending Project How to Lessen Your Chances of Being Flagged as an Outlier - Lessons Learned - • Ensure that applicants are informed about all loan products they qualify for and document an applicant’s choice of lending unit/loan product to avoid concerns of ‘steering.’ • Monitor third-party (broker) practices for discriminatory lending practices. • Develop Special Purpose Credit Programs, as detailed under ECOA, for the benefit of specific groups of consumers in meeting their identified credit needs. 12

13. HMDA Outlier Fair Lending Project Steps to Take to Expedite Outlier Reviews - Lessons Learned - • Verify the accuracy of your data (HMDA or otherwise) before you submit it. • Ensure there is only one place that maintains electronic data. • Be accurate and comprehensive in your timely responses to FDIC requests. • a. At the onset, identify all factors that were used to price/underwrite the loans at issue, and have documentation that substantiates such criteria. Raising new factors later on will only cause delays. • Clearly identify different lending channels within your institution where the targeted loan product is underwritten or priced differently. • Clearly identify any other types of loans that were underwritten/priced differently (i.e., employee loans, workout loans, etc.). 13

14. HMDA Outlier Fair Lending Project Steps to Take to Expedite Outlier Reviews - Lessons Learned - • Be prepared for the pricing/underwriting criteria interview in order to provide clear, accurate, and complete responses. • The FDIC will tailor its review based on these responses. • Ask clarifying questions at any time during the process. • If pricing differences exist by branch/market/region, have written policies that indicate as much. • If pricing of a loan is priced based on certain pricing factors, the loan file should clearly reflect these pricing factors. 14