Fair Lending and HMDA
Quilty & Associates
March 4, 2011
Agenda
 Fair Lending Overview
 HMDA Data Integrity
 Changes on the Horizon
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Fair Lending Overview
 Fair Lending Regulatory Framework
 Types of Lending Discrimination
 Federal Financial Institutions Examination Council
(“FFIEC”) Fair Lending Examination Guidelines
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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
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Fair Lending Regulatory Framework
Equal 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.
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Fair Lending Regulatory Framework
Equal 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;
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Fair Lending Regulatory Framework
Equal 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.
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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.
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Fair Lending Regulatory Framework
Home 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.
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Types of Lending Discrimination

Overt evidence of disparate treatment

Comparative evidence of disparate treatment

Evidence of disparate impact
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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.
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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.
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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.
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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.
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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
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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
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Fair Lending Examination Guidelines
Table 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
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Fair Lending Examination Guidelines
Table 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
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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
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Overview
1. HMDA Survival Steps
2. Common Error Trends
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HMDA Survival Steps
Step 1: Identify an employee who will be responsible for
overall HMDA quality
 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.
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HMDA Survival Steps
Step 2: Write HMDA policy and procedures
 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
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HMDA Survival Steps
Step 3: Identify the HMDA reportable loans
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
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HMDA Survival Steps
Step 3: Identify the HMDA reportable loans
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.
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HMDA Survival Steps
Step 3: Identify the HMDA reportable loans
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.
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HMDA Survival Steps
Step 3: Identify the HMDA reportable loans
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
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HMDA Survival Steps
Step 3: Identify the HMDA reportable loans
 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?
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HMDA Survival Steps
Step 4: Review HMDA reportable loans for data
integrity
 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
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HMDA Survival Steps
Step 5: React to the error trends!
 Analyze the error trends: find the source of the problem
 SHARE THE INFORMATION!
 Strengthen Internal Controls
 TRAIN, TRAIN, TRAIN!!
 Revise HMDA procedures if necessary
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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
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HMDA Survival Steps
Step 6: Don’t Forget HMDA Disclosure Requirements
 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)
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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

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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)
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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:
1.
Applicant expressly withdraws


2.
Loan is Incomplete

3.
4.
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
Must send “Regulation B Compliant” Notice of Incomplete Application
Loan is Denied
Loan is Approved
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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
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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
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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?
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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!
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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.
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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
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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
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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.
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Questions?
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