Fair Lending S. Union Park Ave. Suite 260 Midvale, UT P

Transcription

1 Fair Lending 7070 S. Union Park Ave. Suite 260 Midvale, UT P

2 ABOUT US Visible Equity is a software development company that focuses on web-based applications for financial institutions. Our team is comprised of experts in financial economics, mathematical and statistical modeling, and intelligent data systems. We specialize in transforming slow, expensive, and complex tasks into real time, cost effective, and simple results. Our valuation capabilities, predictive analytics, and advanced modeling applications give you the insight and tools to effectively manage your portfolio and make better informed, data-driven decisions. Our user friendly, web-based system merges your data with our advanced analytics and market data to produce reports and analysis that are current, relevant, and insightful. In a nutshell, we help make the obscure visible, allowing our clients to maximize their return on equity. For more information please visit your website: 2 of 58

3 Fair Lending Agenda Fair Lending The Basics Assessing Your Fair Lending Risk Fair Lending Performance Reports Statistical Modeling and Comparative File Reviews Building a Fair Lending Program 3 of 58

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8 Fair Lending the Basics Fair Lending Laws and Prohibited Basis Groups FH Act BOTH ECOA -Handicap -Race or color -Marital Status -Familial Status -Religion -Age -National Origin -Source of Income -Sex 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 consumer credit transaction (including small businesses). + Reg B, HMDA, and CRA are related 8 of 58

9 Fair Lending the Basics Fair Lending and The Lending Cycle Pre- Application -Advertising & Market Selection -Channels -Responding to Inquiries -Modifications -Default Remedies -REO Servicing / Post-closing Application -Approval Criteria -Final Terms & Conditions -Appraisal Practices Underwriting / Closing -Level of Assistance -Use of 3 rd Parties -Initial Terms & Conditions 9 of 58

10 Fair Lending the Basics Prohibited Practices A lender may not because of a prohibited basis: 1. Fail to provide or provide different information or services regarding any aspect of the lending process 2. Discourage or selectively encourage individuals who inquire or apply for credit 3. Refuse to extend credit or use different standards in determining whether to extend credit 4. Vary the terms of credit offered 5. Use different standards to evaluate collateral 6. Treat a borrower differently in servicing a loan or making invoking default remedies 7. Use different standards for pooling or packaging loans in the secondary market A lender may not discriminate on a prohibited basis by considering the characteristics of: 1. An applicant, prospective applicant, or borrower 2. A person associated with an applicant, prospective applicant, or borrower 3. The present or prospective residents of the property to be financed 4. the neighborhood where the property to be financed is located Pre-Application Servicing / Postclosing Application Underwriting / Closing 10 of 58

11 Fair Lending the Basics Types of Discrimination 1. Disparate Treatment Treating an applicant or borrower differently due to a prohibited basis during any aspect of the lending process. >Overt Discrimination -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 *Does not require evidence the lender intended to discriminate or was motivated by prejudice 2. 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 not justified by a valid business propose or that the business justification could be accomplished using a less discriminatory alternative. 11 of 58

12 Fair Lending the Basics Discrimination? 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-toincome ratio for each applicant. Example 2 Credit Card Limits: -$750 for age $1,500 for age over 30 Yes! Prohibited Basis: Marital Status Discrimination Type: Disparate Treatment-Overt Prohibited Practice: Refuse to extend credit or use different standards in determining whether to extend credit Yes! Prohibited Basis: Age Discrimination Type: Disparate Treatment-Overt Prohibited Practice: Vary the terms of credit offered 12 of 58

13 Fair Lending the Basics Discrimination? Example 3 Borrower National Origin Discrimination? Potentially Prohibited Basis: National Origin Number of Home Purchase Loans Average Interest Rate Hispanic % Non Hispanic White % Discrimination Type: Disparate Treatment-Comparative Evidence Prohibited Practice: Vary the terms of credit offered (Pricing) Example 4 The financial institution has a policy not to make loans less than $150,000. The average home value in the area is less than $150,000 resulting in no loans being made in certain areas. Discrimination? Potentially Prohibited Basis: Race, Familial or Marital Status Discrimination Type: Disparate Impact 13 of 58

14 Fair Lending the Basics U.S. Department of Housing and Urban Development Office of Policy Development and Research All Other Things Being Equal: A Paired Testing Study of Mortgage Lending Institutions Final Report April of 58

15 Fair Lending the Basics All Other Things Being Equal: A Paired Testing Study of Mortgage Lending Institutions In a paired test, two individuals one white and one minority pose as homebuyers and inquire about the availability and terms for home mortgage loans. Because the two members of a tester team present themselves as equally qualified borrowers in every respect except their race or ethnicity, systematic differences in the treatment they receive provide direct evidence of adverse treatment discrimination. The Results? 15 of 58

16 Fair Lending the Basics The Results In Los Angeles - Blacks were offered less coaching than comparable white homebuyers and were more likely to be encouraged to consider an FHA loan. Hispanics were denied basic information about loan amount and house price, told about fewer products, and received less follow-up than comparable Anglo homebuyers. In Chicago Blacks were denied basic information about loan amount and house price, told about fewer products, offered less coaching, and received less follow-up than comparable white homebuyers. Hispanics were quoted lower loan amounts or house prices, told about fewer products, and offered less coaching than comparable Anglo homebuyers. 16 of 58

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20 Fair Lending the Basics- 20 of 58

21 Fair Lending the Basics Bank of America Settlement ($335 M)- Accused of Discriminatory Lending (at Countrywide Home Loans) Discrimination Type: Prohibited Practices: Disparate Treatment-Comparative Evidence (Statistical Analysis & Interviews) Steering Claims (vary the terms of credit, others) Pricing Claims (vary the terms of credit) Findings: African Americans 3x more likely to be put in a subprime product than similarly situated white borrowers Sources of Fair Lending Risk: Policies and procedures inadequate Loan officers were given discretion in setting rates, fees, and terms Loan officers were compensated for putting buyers in higher priced loans 21 of 58

22 Fair Lending Assessing Your Risk The 5* Main Sources of Potential Fair Lending Risk 1. Marketing Activities 2. Discretion Permitted 3. Exceptions 4. Role of Third Parties 5. Incentives & Compensation *In addition to overt discrimination and the technical requirements of Reg B and other fair lending laws. 22 of 58

23 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Marketing Activities How and where you offer credit products are not just fundamental business decisions, they have fair lending implications as well. 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 Steering Reverse redlining is the deliberate targeting of residents of such neighborhoods with less advantageous or potentially predatory products. The guiding of an applicant or a borrower to a less advantageous product on a prohibited basis rather than on the legitimate needs. Advertising Advertising methods that could discourage individuals from apply for loans or in media that exclude specific regions are sources of fair lending risk 23 of 58

24 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Marketing Activities On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) Market Demographics Does your institution operate in a competitive and diverse market or a market with little completion and diversity? Do the areas in which you operate exclude any areas that might be considered majority minority or lower income? Stable Market/All Areas Low Competition Low Diversity Evolving Market/Sporadic Areas High Competition High Diversity 24 of 58

25 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Marketing Activities On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) Delivery Channels Does your institution have multiple delivery channels (e.g. website, telephone, face-to-face, third parties, etc.)? Do decisions and processes related to application processing, underwriting, pricing, servicing, etc. vary by channel? Do you have subprime or similar subsidiaries or related businesses you refer certain applicants to? Limited Channels Decisions/Processes do not vary by channel No Subprime Subsidiaries/Partners Multiple Channels Decisions/Processes vary by channel No Subprime Subsidiaries/Partners 25 of 58

26 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Marketing Activities On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) Product Complexity Do you offer non-traditional, subprime or other products the industry would consider complex, difficult to understand, or potentially less advantageous than traditional products? Traditional Product Mix New Products Reviewed for Fair Lending Compliance Complex and Non-traditional Product Mix New Products Not Reviewed Advertising How complex is your advertising program? Do you advertise in multiple media platforms and/or in multiple languages? Is your advertising constantly changing? Do you advertise exclusively in areas or through media that is targeted at areas considered majority minority or lower income? Could any of your advertising pieces be considered threatening or discouraging to a protected class? Limited Advertising No Recent Changes Broad Based Extensive Advertising Constantly Changing Advertising Targeted 26 of 58

27 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Marketing Activities How did you score? Source Marketing Activities -Market Demographics (1-5) -Delivery Channels (1-5) -Product Complexity (1-5) -Advertising (1-5) Score Low Medium High <= >=16 27 of 58

28 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Discretion Permitted Allowing discretion has many benefits and in fact is usually used in the favor of the applicant or borrower. However, the level of individual discretion permitted in certain activities such as approvals or pricing increases an institution s fair lending risk. Centralized lending operations with clear and objective non discriminatory policies and procedures that are taught, followed, and monitored significantly reduces the level of fair lending risk. On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) Discretion Permitted How much discretion is permitted? Does the degree of permitted discretion vary by geography, channel, or activity? Can the exercise of discretion impact compensation? Do disparities by a prohibited basis group exist in the discretion exercised? Limited and Consistent Discretion Discretion criteria is clear Discretion does not impact compensation No Disparities Resulting From Exercised Discretion Broad and Variable Discretion Discretion criteria is broad or non-existent Discretion does impact compensation Unexplained Discrepancies Exists 28 of 58

29 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending-Discretion Permitted How did you score? Source Marketing Activities Discretion Permitted Score Low Medium High <= >= of 58

30 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Exception Handling In many cases granting an exception is the right decision. However, exceptions should be made consistently for similar reasons for similarly situated applicants or borrowers. Exceptions should be documented and monitored to ensure they are being used properly. On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) Exception Handling Is file documentation accurate and descriptive? Is rationale objective? Are exceptions low in number? Do exceptions vary by prohibited basis group? Do certain loan officers, branches, etc. have a higher level of granting exceptions? Exceptions are Objective and Well Documented Exceptions are Few No Disparities by Prohibited Basis Group Exceptions are Subjective and Not Well Documented Exceptions are Many Disparities by Prohibited Basis Group 30 of 58

31 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Exception Handling How did you score? Source Marketing Activities Discretion Permitted Exception Handling Score Low Medium High <= >= of 58

32 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Role of Third Parties Third party operators (TPOs) such as mortgage brokers and auto dealers offer legitimate opportunities to extend lending operations and enhance product offerings. 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. 32 of 58

33 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Role of Third Parties Consumer 1. Consumer submits application to Dealer Lender Dealer 6. Dealer sales the contract to the chosen Lender 2. Dealer submits application to Lender(s) Dealer Lender(s) Lender(s) Lender(s) 5. Consumer and Dealer close the sale Q: Where is the Fair Lending Risk in this process? Consumer Dealer 4. Dealer sets actual rate to consumer 3. Lender(s) submit buy rate and dealer compensation to dealer 33 of 58

34 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Role of Third Parties On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) The Role of Third Parties Do you use 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? Little or No Use of Third Parties Due Diligence Performed Written Agreements w/ Accountability Defined Receive Regular Reporting Extensive Use of Third Parties No Due Diligence Performed No Written Agreements w/ Accountability Not Defined Receive No Reporting 34 of 58

35 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Role of 3 rd Parties (TPOs) How did you score? Source Marketing Activities Discretion Permitted Exception Handling Role of Third Parties Score Low Medium High <= >= of 58

36 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending-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. If loan officers or other decision makers are incented to steer borrowers into certain products disparate impact against protected groups can occur. On a scale of 1-5 rate your institution on the level of potential fair lending risk (this does not mean violations are occurring only that the potential exists) Incentives & Compensation Are your loan officer and other decision makers compensated on loan production? Is compensation tied to higher pricing or higher fees? Incentives & Compensation Not Tied to Loan Production Incentives & Compensation Not Tied to Loan Pricing and/or Fees Incentives & Compensation Tied to Loan Production Incentives & Compensation Tied to Loan Pricing and/or Fees 36 of 58

37 Fair Lending Assessing Your Risk The 5 Main Sources of Fair Lending Risk-Incentives & Compensation How did you score? Source Marketing Activities Discretion Permitted Exception Handling Role of Third Parties Incentives & Compensation TOTAL Score Low Medium-Low Medium Medium-High High <= >= <= >=34 37 of 58

38 Fair Lending Assessing Your Risk 38 of 58

39 Fair Lending Assessing Your Risk 39 of 58

40 Fair Lending Performance Reports Key Fair Lending Performance Reports Applications BOTH Portfolio -Acceptance/Denial Rates -Marketing/Redlining -Modifications/Defaults -Expected Acceptance Rates -Steering -Application Disposition -Pricing -Exceptions -Decisionmaker Analysis 40 of 58

41 Fair Lending Performance Reports Key Fair Lending Performance Reports-Application Rates Approved Applications Denied Applications Total Applications Approval /Denial Rates Denial Relative Impact White %/9.1% 1.0 Hispanic %/28.6% 3.14 Black %/50% 5.5 Etc. -Application Rates by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metric (Income, Majority Minority, Etc. -Higher denial rates indicate potential disparate treatment. 41 of 58

42 Fair Lending Performance Reports Key Fair Lending Performance Reports-Expected Approval Rates Actual Approval Rate Expected Approval Rate Status White 92.3% 90.0% OK Hispanic 55.0% 58.2% OK Black 22.3% 43.4%! Etc. -Approval Rates by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metric (Income, Majority Minority, Etc. -The Expected Approval Rate incorporates borrower and collateral risk. Differences are an indication of disparate treatment. -The difference between actual and expected must be significant in terms of both statistical accuracy and magnitude. 42 of 58

43 Fair Lending Performance Reports Key Fair Lending Performance Reports-Application Disposition Total Applications Approved Applications Denied Applications Withdrawn Applications White (83.3%) 100 (8.3%) 25 (2.0%) Etc. Hispanic (62.5%) 200 (25.0%) 50 (6.2%) Black (37.5%) 150 (37.5%) 60 (15.0%) Etc. -Application Disposition by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metric (Income, Majority Minority, Etc.), Etc. -High Levels of withdrawn applications are an indicator of potential disparate treatment. 43 of 58

44 Fair Lending Performance Reports Key Fair Lending Performance Reports-Marketing/Redlining % of Loan Count % of Market Area Market Relative Impact Upper Income 12.5% 10%.8 Middle Income 70% 60%.86 Moderate Income 12.5% 5%.4 Low Income 5% 25% 5.0 -Applications or Loans by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metrics (Income, Majority Minority, Etc.), Etc. -Disparities between application or portfolio mix and market area mix are an indication of potential redlining. 44 of 58

45 Fair Lending Performance Reports Key Fair Lending Performance Reports-Steering % White % Hispanic % Black Etc. Product A 70% 10% 10% Product B 75% 8% 8% Product C 7% 85% 80% Etc. -Applications or Loans by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metrics (Income, Majority Minority, Etc.), Etc. -Higher levels of Prohibited Basis Groups in certain products are an indication of potential steering. 45 of 58

46 Fair Lending Performance Reports Key Fair Lending Performance Reports-Pricing Avg. Rate Expected Rate Risk Indicator Etc. White 5.0% 5.2% OK Hispanic 7.5% 5.7%! Black 9.2% 9.5% OK Etc. -Rates by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metric (Income, Majority Minority, Etc. -The Expected Rate incorporates borrower and collateral risk. Differences are an indication of disparate treatment. -The difference between actual and expected must be significant in terms of both statistical accuracy and magnitude. 46 of 58

47 Fair Lending Performance Reports Key Fair Lending Performance Reports-Exceptions % White % Hispanic % Black Etc. Exception Code % 5.2% 4.2% Exception Code % 5.7% 3.5% Exception Code % 1.5% 2.5% Etc. -Exceptions by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metric (Income, Majority Minority, Etc. -Differences between control group (White) and prohibited basis groups are an indication of disparate treatment. 47 of 58

48 Fair Lending Performance Reports Key Fair Lending Performance Reports-Decision Maker Analysis Avg. Rate Expected Rate Risk Indicator Etc. Loan Officer A 5.0% 5.2% OK Loan Officer B 7.5% 5.7%! Loan Officer C 9.2% 9.5% OK Etc. -Rates by Loan Officer, Underwriter, Dealer, Branch Etc. -The Expected Rate incorporates borrower and collateral risk. Differences are an indication of disparate treatment. -The difference between actual and expected must be significant in terms of both statistical accuracy and magnitude. 48 of 58

49 Fair Lending Performance Reports Key Fair Lending Performance Reports-Modifications/Defaults Modifications Granted Modifications Denied % White % Hispanic % Black Etc. 75.0% 5.2% 4.2% 2.5% 85.7% 93.5% -Modification Rates by Race/Ethnicity, Gender, Age, Marital Status, Census Tract Metric (Income, Majority Minority, Etc. -Differences between % of control group (White) and % of prohibited basis groups are an indication of potential disparate treatment. 49 of 58

50 Fair Lending Statistical Analysis Calculating Expected Race/Ethnicity Step 1. Match Borrower to Census Tract Step 2. Calculate Baseline Expected Race Using Census 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) 50 of 58

51 Fair Lending Statistical Analysis Calculating Expected Rate Use multivariate regression analysis with variables such as: -Credit Score -Loan-to-Value -Debt-to-Income -Baseline Rate -Etc. This analysis allows for more than one metric to be compared at the same time! 51 of 58

52 Fair Lending Statistical Analysis Comparative File Review The goal of a comparative file review is to ensure all applicants received a comparable level of assistance, the credit decision for similarly situated borrowers was the same, the terms and conditions were substantially the same, and whether any remedial action is necessary. Approve/Deny Decisions Use Only Marginal Transactions Applicants that are neither clearly qualified nor clearly unqualified. Determine Benchmark Applicant The applicant with the least deficient reason for denial. In other words the most qualified of the denied applications for a given metric. Compare marginal approvals with Benchmark. If there are no approvals less qualified for a given metric then no disparate treatment exists. If there are approvals less qualified than the bench mark then potential disparate treatment exists. Overlap Approval An approved applicant that is no better qualified than the benchmark applicant. Note all overlap approvals and research further. 52 of 58

53 Fair Lending Statistical Analysis Comparative File Review The goal of a comparative file review is to ensure all applicants received a comparable level of assistance, the credit decision for similarly situated borrowers was the same, the terms and conditions were substantially the same, and whether any remedial action is necessary. Pricing Decisions Compare each more favorably treated control group with similarly situated prohibited basis group who received less favorable treatment. Follow up with and resolve any disparate treatment found. 53 of 58

54 Fair Lending Program Any weaknesses or violations are promptly corrected, including appropriate restitution. Tone at The Top Fair Lending is cultural and reinforced at the highest levels and throughout the organization in both written and verbal forms. Correction Policies & Procedures Fair lending compliance and performance is regularly reported and monitored P&Ps provide clear guidance and are free of overt discrimination. Performance Monitoring Assessing Fair Lending Risk Training occurs regularly, is well documented, Training attendees are tested, and trainings include role specific instructions. Trainees include top management, board members, and new employees. Assess and correct or mitigate, as appropriate, heighted fair lending risk areas. 54 of 58

55 Fair Lending Program Financial Institutions make loans to any and all qualified borrowers using sound underwriting and pricing decisions applied consistency and equally to similarly situated borrowers without regard to any prohibited basis, such as race, gender, or age. Fair Lending, then, is the natural state of bank (credit union) credit operations. ABA Toolbox 55 of 58

56 Sources -Visible Equity -Comptroller s Handbook, Fair lending, January ABA Toolbox on Fair Lending -Indirect Auto lending-fair Lending Considerations, Webinar, August 6, FDIC Presentation on Fair Lending -NCUA, Office of Consumer Protection, Fair Lending Guide, March of 58

57 GET IN TOUCH "Visible Equity makes consolidating our data and analyzing our concentration risk consistent and easy. Ray Wade American Airlines Credit Union "Visible Equity realizes that all of us look at data in a different way, we all see things in a different perspective, and we're all looking at the data for different reasons. Margaret Hunnicutt Landings Credit Union Address: 7070 S. Union Park Ave., Suite 260 Midvale, UT Phone: info@visibleequity.com Using Visible Equity has allowed our credit union to focus on addressing potential problems rather than spending endless hours running reports and analyzing data. We continue to be impressed with the service we receive and with the functionality, accuracy, and delivery of the product. Visible Equity has been a great partner to work with for our credit union. Jeff Meyers Utah Community Credit Union facebook.com/visibleequity twitter.com/visibleequity 57 of 58

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