How to Prepare for a Fair Lending Examination: Part I – Examination Scope
Dear Reader,
This newsletter article is the first of a three-part series on How to Prepare for a Fair Lending Examination. You’ll learn what to expect from an examiner and ways to complete a self assessment steps.
Margaret carefully explains the rules published in August 2009 by the OTC, FDIC, Federal Reserve Board, OTS and NCUA that were adapted from the Interagency Policy Statement on Fair Lending issued in March 1994.
A commitment to responsible lending is an enterprise-wide program that is developed in accordance with your institution’s size and business model. You’ll surely be a step ahead in your exam if you have a solid plan in place for self-testing and monitoring.
I’m confident you’ll find Margaret’s articles helpful.
Anna DeSimone
A residential mortgage lender’s understanding of the examination procedures established under the Interagency Fair Lending Examination Procedures is vital in establishing a valuable fair lending self assessment program. Following the same steps for self assessment as in a regulated fair lending examination is key to ensuring fair lending compliance. This series of articles provides an overview of the fair lending examination process under the Interagency Fair Lending Examination Procedures.
Fair Lending Regulation Overview
The fair lending nondiscrimination requirements of The Equal Credit Opportunity Act (ECOA), Regulation B and the Fair Housing Act (FHAct) covered under the Interagency Fair Lending Examination Procedures touch upon nearly all aspects of the mortgage lending process.
Fair lending discrimination under the above regulations is uncovered by identification of overt evidence of disparate treatment, comparative evidence of disparate treatment and evidence of a disparate impact of a lender’s facially neutral policies and procedures. Overt evidence of disparate treatment would be a policy that explicitly uses prohibited basis identifiers to determine borrower creditworthiness or eligibility. Comparative disparate treatment may be evidenced in disproportionate protected group underwriting denials, pricing inconsistency concerning protected groups, marketing bias or redlining. Disparate impact may result from a facially neutral policy such as a minimum loan amount requirement that disproportionally excludes protected groups.
Determining the Scope of the Fair Lending Examination
Although the fair lending examination arises under the above referenced regulations, information gathered under the requirements of other regulations, such as HMDA or CRA program information, will also be used to determine the scope of the examination and ultimately the existence, or non-existence of discrimination.
The fair lending examiner will narrow the scope of the examination to “focal points” as applicable to each lender’s individual circumstances. The determination of the focal points is where the fair lending examination process begins. As a self-assessment tool, identification of the lender’s own weaker areas would also be helpful in order to guarantee the proper training and compliance where needed the most.
Review of Programs, Policies and Organization
The exam focal points will be determined by the examiner based on a review of a lender’s loan products (with a focus on special programs specifically targeted to assist underserved areas), markets, demographics and volume of lending for each loan product offered. In review of the lender’s documentation in determination of the scope, the examiner will be looking for overt indicators of discrimination; disparate treatment in underwriting, pricing, steering, marketing and discriminatory redlining.
Per the Interagency Examination Procedures, the examiner’s review of the lender’s compliance management system for purposes of examination scope will take note of the following risk factors:
- The strength of lender’s overall compliance record,
- The completeness of ECOA and HMDA monitoring information records,
- Data and recordkeeping issues which result in unreliable information,
- Previous examinations uncovered fair lending problems,
- The overall compliance program compared to other similar institutions,
- The regularity of updates to the compliance program to incorporate regulation changes,
- Strength of fair lending training available and required for employees.
Self-Testing and Evaluating
Exam scope decision may include review of a lender’s self-tests or self-evaluations. If requested, a lender must share all information concerning self-evaluations, however only need share limited information concerning self-tests.
The Interagency Fair Lending Examination Procedures define a self-test as “a program, practice or study that is designed and specifically used to assess the institution’s compliance with fair lending laws that creates data not available or derived from loan, application or other records related to credit transactions”.
The example given of a self-test is that of use of a tester, or ‘mystery shopper’ to review instances of disparate treatment in the initial loan shopping period. The Procedures define a self-evaluation as a process that “does not create any new data or factual information, but uses data readily available in loan or application files and other records used in credit transactions and, therefore, does not meet the self-test definition.”
Additional Areas of Review
Other areas examiners will take into consideration concerning the scope and focal points of the examination are broker activity, loan purchases and the size and amount of lending centers within an institution. In terms of broker activity the examiner will be looking for instances of redlining or steering, but will also evaluate loan terms and conditions as well as underwriting where applicable.
In the case of purchased loans not originally underwritten by the lender, the examiner will determine whether the lender is purchasing loans or other debts or securities which relate to, or which are secured by dwellings in certain communities or neighborhoods but not in others based on a prohibited factor. The examiner will not compare the lender’s underwriting standards with that of the loan originator in the case of a purchased loan, however the examiner may review whether the lender was able to influence the origination process based on the lender’s loan purchasing requirements. Where a lender has many branches or a large lending center, the examiner will narrow the scope by determining which locations or lending center areas present the highest risk of discrimination.
A Guide to Potential Scoping Information
The Appendix to the Interagency Fair Lending Examination Procedures provides a listing of “potential scoping information” examiners may request to review in determining the focal points of the examination. Lenders should ensure that this provided information is accurate and available as applicable:
Information from the institution’s compliance program including:
- Organization charts identifying those individuals who have lending responsibilities or compliance, HMDA or CRA responsibilities, together with job description for each such position;
- Lists of any pending litigation or administrative proceedings concerning fair lending matters;
- Results of self-evaluations or self-tests, including both internal and independent fair lending audits;
- Any written or printed statements describing the institutions’ fair lending policies and/or procedures;
- Training materials related to fair lending issues including records of attendance;
- Records detailing policy exceptions or overrides, exception reporting and monitoring processes;
- Demographic information prepared or used by institution. (Note that market may be larger than the CRA assessment area); and
- Any fair lending complaints received by institutions and responses thereto, including CRA file.
Information concerning Lending Policies / Loan Volume such as:
- Internal underwriting guidelines and lending policies for all consumer loan products;
- A description of any credit scoring system in current use or in use during the exam period;
- Pricing policies for each loan product, and for both direct and indirect loans. (Do the pricing policies include the use of “overages”, are any “sub-prime” products offered or if risk-based pricing is used);
- A description of each form of compensation plan for all lending personnel and managers;
- Advertising copies for all loan products and internet site addresses;
- The most recent HMDA/LAR, including unreported data if available and any existing registers for each non-HMDA loan product;
- A description of any application or loan level databases maintained, including a description of all data fields within the database or that can be linked at loan level;
- Forms used in the application and credit evaluation process for each loan products; and
- Lists of service providers.
Conclusion of the scoping process
The determination of the examination scope includes the potential review of numerous areas and documentation. However, the Examination Procedures prescribe that the examiner will take into consideration “the extent to which these information requests can be readily organized and coordinated with other compliance examination components to reduce burden to Lender.” The examiner will “not request more information than the exam team can be expected to utilize during the anticipated course of the examination.”
Based on the risk factors uncovered, the examiners will structure the scope of testing by comparative file analysis in areas presenting the highest risk. Usually the comparative file tests will include underwriting, pricing, steering, marketing, redlining and credit scoring system analysis. If overt discrimination is uncovered in the scoping the process, it will be documented and included in the final report.
This article is the first in a three part series outlining the 2009 Interagency Fair Lending Examination Procedures. The next article will outline the fair lending examination procedure.
About the Author
Margaret is AVP & Senior Counsel of Bankers Advisory and serves as the firm’s Director of Regulatory Compliance Research. She received her Juris Doctor from Suffolk University Law School and admitted to the Massachusetts bar. She serves on the Compliance Committee of the Massachusetts Mortgage Bankers Association. She can be reached at margaret@bankersadvisory.com
Margaret Wright, JD, is regulatory compliance director with CLA. She is a graduate of Stonehill College and earned her juris doctor at Suffolk University Law School. She is admitted to the Massachusetts Bar.
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