FAIR LENDING: WHY MAPS MATTER

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Ariel Foster
7 years ago
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1 Headquarters TCA / Thomas Compliance Associates, Inc N. Mildred Avenue, Suite 150, Chicago, Illinois REGS A TCA MANAGEMENT PAPER FAIR LENDING: WHY MAPS MATTER

2 Lending Data: One Map Speaks 1,000 Words The Fair Lending regulatory hot button continues to get hotter: Fair Lending enforcement has migrated beyond the federal banking agencies and the Department of Justice to the Fair Trade Commission and various state attorneys general, who have ramped up enforcement of federal and state fair lending laws. With so many high-powered agencies primed to strike at financial institutions, it is more important than ever for each bank to be ready to answer questions about its Fair Lending program and performance. Completing a Fair Lending Risk Assessment is the first step. A well-constructed Risk Assessment that ultimately defines how well your institution identifies, measures, controls and monitors lending processes to ensure that discriminatory, unfair, deceptive, abusive and predatory lending acts or practices do not occur should provide the hard information you need to stand up to regulatory and community activist probes. Your Risk Assessment should address the bank s exposure to each of three sources of potential Fair Lending risk: Overtly discriminatory policies and practices. Use of nondiscriminatory policies and procedures that nonetheless have discriminatory effects. Use of discretion in the lending function in relation to prohibited activities. The risk assessment should include all phases of lending operations, beginning with marketing and the application process, including underwriting and pricing of loans originated, and incorporating servicing, collection and foreclosure/loss prevention efforts. There is no one-size-fits-all risk assessment process. Instead, the risk assessment should be tailored to reflect each bank s unique circumstances (organization, structure, product lines, delivery channels, area demographics and competition) consistent with safe and sound operating standards, and ensuring compliance with applicable nondiscrimination laws and regulations. Even with this information at hand, experience tells us (and our client banks) LAR data, census tract location and perhaps surprisingly effective mapping may be the keys to avoiding the Fair Lending griddle. If your bank is a HMDA reporter, the Loan Application Register (LAR) continues to be the source for tracking loan data. The LAR data not only include lending by race, ethnicity and gender, but also census tract location. Census tract location is important because it allows a bank (or regulator or consumer activist) to determine its level of lending penetration in geographies based upon demographic aspects for example, tracts with higher percentages of racial minority population. High-priced mortgages and denied applications also can be tracked. Regulators also use a bank s LAR to perform Fair Lending reviews and CRA performance evaluations. In order to demonstrate an effective and proactive Fair Lending program, financial institutions need to review the information as depicted on various charts that document the bank s performance. These

With so many high-powered agencies primed to strike at financial institutions, it is more important than ever for each bank to be ready to answer questions about its Fair Lending program and

3 charts (along with explanatory narrative) should be presented to senior management, loan and audit committees, and the Board of Directors.

4 The sample chart here outlines a bank s lending performance as compared to the HMDA-aggregate Lending HMDA- Aggregate vs. Generic BANK Segment All Institutions Generic BANK Total Applications Originated Denied Total Applications Originated Denied Race Number %Total Number %Apps Number %Apps Number %Total Number %Apps Number %Apps Native American Asian Black Pac. Islander White 5, , or more minority Joint N/A Ethnicity Hisp/Latino Not Hisp/Latino 6, , Joint N/A Gender Joint 3, , Male 1, , Female 1, , N/A Minority Census Tract <10% 1, , %<20% 3, , %<50% 2, , %<80% >80% Total 7, , The chart provides information about the bank s performance against other lenders receiving applications within its assessment area; information about the bank s approval and denial rates between the various races and ethnicities, along with the gender of the applicants; and information on application, origination, and denial rates for those census tracts that are predominately minority populated. Such a chart is a valuable comparison tool. It allows the bank to see its Fair Lending position at a particular point in time. Loan data presented in this fashion is similar to what regulators generate when they compare your Fair Lending - and CRA data to the HMDA Aggregate to determine whether the bank s lending is reaching all segments of its core lending area. As useful as this kind of chart is, the lending picture is not complete. The chart provides key information, but it does not provide a visual impact as to where, geographically, the bank is receiving its lending applications and generating originations. That s why a map of your lending data is important. A map gives management, the Audit Committee and the Board something tangible about the bank s lending. Visually, it identifies those areas where the bank is not lending. The sample map provides a visual element that a chart simply cannot do.

Number %Apps Native American 24.3 12 50.0 3 12.5 1 0.3 0 0.0 0 0.0 Asian 223 3.0 160 71.7 26 11.7 8 2.7 6 75.0 0 0.0 Black 751 10.2 477 63.5 202 26.9 19 6.3 12 63.2 2 10.5 Pac. Islander 10 0.1 5 50.

6 The areas marked in red include a minority population of between 50 and 80 percent; the orange areas include a minority population greater than 80%. The dots represent loans originated by the bank. The color codes identify the minority population of the census tracts. The map, in conjunction with the chart and any other analysis, provides a geographic representation of the bank s Fair Lending position a simple tool to help the Audit Committee and Board of Directors assess the bank s Fair Lending performance. The map also can identify markets and opportunities available to the bank. Although not displayed here, a bank s branches and loan production office locations can be included. Creating charts and maps is more difficult, though not impossible, if your institution is not a HMDA lender or is not located in an MSA. Banks that are not HMDA reporters will need to extract the lending data from their origination system or core processor in a format (a spreadsheet or a comma delimited file) that can be shown in a data chart and/or map. The bank can also keep a separate Loan Application Register to capture the loan data, including information on race, gender and ethnicity. Map-making does not necessarily require a bank to buy expensive software. Outsourcing the map generation function is a viable option. Outsourcing is more cost effective, and multi-year contracts with software vendors can be avoided. TCA generates maps based on application, origination and denial data, plus maps on racial demographics and, for CRA analysis, income demographics of the assessment area for its clients. You might also consider a map of your assessment area, to be included as part of your bank s CRA public file. #####

The map, in conjunction with the chart and any other analysis, provides a geographic representation of the bank s Fair Lending position a simple tool to help the Audit Committee and Board of

Fair Lending Analysis Made Easy. Presented by: Ian Dunn CEO,

Fair Lending Analysis Made Easy Presented by: Ian Dunn CEO, Agenda 1 The Basics 2 Assessing Your Potential Fair Lending Risk Exposure 3 Key Fair Lending Analysis & Reporting The Basics- Fair Lending Laws