Fair Lending Risk Assessment June 24, 2016 by: Erica M ... University… · Fair Lending Risk...

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Fair Lending Risk Assessment

June 24, 2016

by: Erica M. Torres, CRCM

Today’s Agenda

• Scope of Fair Lending

• Forms of Discrimination

• Regulatory Environment / Enforcement Actions

• Fair Lending Risk Assessment Methodology

• Fair Lending Risk Assessment Components

• Enterprise Risk Life Cycle

• Resources

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Scope of Fair Lending

Fair Lending Regulations• Equal Credit Opportunity Act - Regulation B • Fair Housing Act• Home Mortgage Disclosure Act - Regulation C• Fair Credit Reporting Act / FACTA - Regulation V• Truth in Lending Act – Regulation Z• Real Estate Settlement Procedures Act – Regulation X• State Statutes

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Scope of Fair Lending

Prohibited Factors

• Race • Color • Religion • National Origin• Sex • Marital Status• Age

• Exercise in good faith of a right under the Consumer Credit Protection Act.

• Disability / Handicap• Familial Status• State Law

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Scope of Fair Lending

Scope of Fair Lending

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Overt Discrimination: a specific, observable action taken against a person or class of persons because of protected status.

Disparate Treatment: an established practice based on discriminatory intent that adversely impacts a protected group.

Disparate Impact: a facially neutral practice that causes a substantial adverse impact on a protected group, and which cannot be justified as serving a legitimate business goal.

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Forms of Discrimination

Regulatory Environment

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Regulatory Environment

CFPB’s Office of Fair Lending and Equal Opportunity“We work to ensure fair, equitable, and nondiscriminatory access to credit for both individuals and communities through:• Data-driven research and analysis of consumer

financial markets and services;• Enforcement and oversight of Federal fair lending

laws; and• Promotion of fair lending compliance and education

among industry, fair lending, civil rights, and consumer and community advocates”

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Regulatory Environment

“We’re making progress towards ensuring fair access to credit.”

Focused on potential discrimination in:• Mortgage lending • Auto Lending • Credit cards market• Recipients of disability income• 2016 – small business lending

2015 efforts required $108 Million in restitution10

Regulatory Environment

CFPB Bulletin – May 2015Reminder to provided non-discriminatory access to credit for applicants with Section 8 income• Clear underwriting policies;• Training for underwriters and loan originators; and • Monitor compliance with underwriting policies

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Regulatory Environment

CFPB Supervisory Highlights – Winter 2015• Good Faith Estimate fee errors• Loan Advertising errors (social media)• Prohibited treatment of protected forms of

income– Part time employment– Annuity, pension or retirement benefit– Non-employment sources, i.e. Social Security – Public Assistance income

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Regulatory Environment

HMDA Rule ModificationsBeginning January 1, 2018 – new data fields:• About applicants, borrowers and underwriting

processes– Age, credit score, debt-to-income ratios

• Features of the loan – Pricing, points and fees, origination charges

• Action taken and reasons for denial

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Regulatory Analysis

Fair Lending Risk-Based Prioritization Approach1.Complaints and Tips2.Supervisory and Enforcement History3.Quality of CMS4.Data Analysis5.Market Insights

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Regulatory Analysis

Fair Lending Supervision Program• ECOA Baseline Review

• ECOA Targeted Review

• HMDA Data Integrity Review

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Enforcement Actions

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Enforcement Actions

May 2015: Provident Funding Associates• CFPB and DOJ joint complaint • Charging higher broker fees on mortgages to African-

American and Hispanic borrowers that non-Hispanic White borrowers

• $9 Million in damages to harmed borrowers• Continue to operate with non-discretionary broker

compensation policies and procedures, training program, and broker monitoring program

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Enforcement Actions

July 2015: America Honda Finance Corp. $25 MillionSettlement for fair lending allegations relating to higher loan rates to minorities• Accused of charging African American, Asian and

Hispanic car buyers higher interest rates on auto loans• $24 Mil. to a fund for car buyers overcharged• $1 Mil. for consumer education efforts

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September 2015: Fifth Third BankCFPB and DOJ joint action for discriminatory auto loan pricing and illegal credit card practices• $18 Million to harmed African American and Hispanic

borrowers• Deceptive marketing of credit card add-on products

resulting in $3 Million in relief to eligible borrowers and $500,000 penalty

• Required to reduce or eliminate entirely dealer discretion

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Enforcement Actions

September 2015: Hudson City Savings Bank CFPB and DOJ joint action for discriminatory lending practices that provided unequal access to • Avoided locating branches & mortgage brokers in

Majority-Black-and-Hispanic communities• Excluded these communities from marketing

strategies• Excluded these majority neighborhoods from

assessment area20

Enforcement Actions

Enforcement Actions

Feb 2016: Toyota Motor Credit Corp. $21.9 Million• CFPB and DOJ resolved action • Restitution to African American, Asian and Pacific Islander

borrowers that paid higher interest rates on auto loans• Substantial reduction to dealer discretion and

accompanying financial incentives to mark up interest rates

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Enforcement Actions

May 2016 - CFPB $85k fine against Loan Officer for RESPA § 8• LO shifted fees to/from various loans; allowing him to

manipulate loan costs to increase loans closed (influencing his commissions)

• Personal Liability and 1 Year ban from mortgage industry

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How to Avoid Fair Lending Issues

DONT MAKE LOANS

OR

PERFORM A FAIR LENDING RISK ASSESSMENT

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Fair Lending Risk Assessment

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Fair Lending Risk Assessment

The Regulators are “requesting” institutions to establish a Fair Lending risk assessment of their applicable loan programs. The risk assessment must:

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Fair Lending Risk Assessment

One possible approach:1.List out all of the loan products offered by the institution.2.Determine whether any products should be aggregated together (ex. all first mortgage products) or assessed separately.3.Break out the loan processes for each area into sub categories (ex. Pre-application/application, processing/underwriting, servicing, etc.…).

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Fair Lending Risk Assessment

4. For each sub category, identify potential factors of risk and describe the fair lending risks and controls for that area.

5. Aggregate this information to formulate overall category risk ratings and an overall rating for the product as a whole.

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Fair Lending Risk Assessment

Highlights and Best Practices:• Both business line personnel and compliance

personnel should be involved in assessing the product.

• Separately evaluate both the inherent risk of the product and the quality of controls that are in place.

• Ensure periodic updates and revisions occur as the nature of products or regulatory environment changes

• Third Party/Vendor Management

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Fair Lending Risk Assessment

FACTORS

• Corporate Governance• Steering Indicators• Redlining• Marketing• Application• Processing• Predatory Lending• Servicing • Collections

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Fair Lending Risk Assessment

Corporate Governance• Exam / Audit History• Litigation• Compliance Management Structure

• Fair Lending Policies / Procedures• Fair Lending Training• Board Oversight• Monitoring

• Regulatory Change Management• Complaint Management Program• Vendor Management Program

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Fair Lending Risk Assessment

Steering Indicators• Loan Compensation / Incentives• Discretionary Authority• Standards / Controls for designation of Prime and

SubPrime loan programs• Ability / Restriction to move from SubPrime to Prime

loan Product• Geographic Locations in relation to SubPrime

lending activities• Post Analysis (Disparate Treatment / Disparate

Impact)

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Fair Lending Risk Assessment

Redlining• CRA Exam History• Dissimilar Loan Products • Dissimilar Loan Terms and Conditions• Post Analysis (Treatment / Impact)

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Fair Lending Risk Assessment

Marketing• Advertise to all classes equally without targeting

minority or low/moderate income applicants• If marketing through brokers, do they concentrate on

1 racial or ethnic class• Market campaign does not Coerce or Deceive (=>

UDAAP)• Complaint Management Analysis

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Fair Lending Risk Assessment

Application• Request for applicant information complies with

regulatory requirements (GMI) • Spousal signatures• Intent to file jointly• Similar Application process Availability / Accessibility• Post Analysis of withdrawn / incomplete applications

for minority applicants

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Fair Lending Risk Assessment

Processing• Credit Scoring Model Factors & Controls• Disparate Processing Times• Uniform Underwriting Standards & Criteria• Guidance and Formality for Underwriting Exceptions • Post Analysis of Approval and Denial Rates;

Underwriting Exceptions

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Fair Lending Risk Assessment

Predatory Lending• Adequate Disclosure of Terms Conditions, Fees • Manual or Automated Underwriting and Discretionary

Authority• Loans Based on Ability to Repay, not Equity• Interest Rate and Fees do not exceed true risk of

loan and costs• Proper Disclosure and imposition of credit insurance• Flipping / Suitability Controls

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Fair Lending Risk Assessment

Servicing • Adequate Disclosure of Terms, Conditions, Fees• Uniform loss-mitigation servicing options• Clear Guidance on loss-mitigation options; policy

exceptions and fee waivers• Limited employee discretionary authority• Complaint Management Analysis

• Post Analysis (Treatment / Impact)

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Fair Lending Risk Assessment

Collections (including Foreclosures)

• Based Purely on Delinquencies • Oversight of Collections Parties, including Vendors• Uniformity in Collection Rates; workout options• Complaint Management Analysis• Post Treatment Analysis

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Sample Fair Lending Risk Assessment Matrix

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Products 1st Mortgages Home Equity Loans HELOCsRisk Categories1. Governance Low Low Low2. Initial Application High Moderate Moderate3. Processing High High Moderate4. Servicing & Modification High Low Moderate5. Collections & Foreclosure High Low Low6. Real Estate Secured (Global)

Moderate Moderate Moderate

7. Fair Lending Compliance Program (Global)

Moderate Moderate Moderate

Overall Risk Rating HIGH MODERATE MODERATE

Next Steps: Use the risk ratings as a basis to evaluate additional controls for high risk areas, and for monitoring adherence to regulations and internal policies and procedures.

Enterprise Risk Life Cycle

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AssessRisk

Audit & MonitorControls

Governance & Oversight

Business Changes Regulatory Changes

(Key) RiskIndicators

Resources

CFPB Supervisory Highlights Fall 2015 http://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf

CFPB Supervisory Highlights Winter 2015 http://www.consumerfinance.gov/reports/supervisory-highlights-winter-2015/

2015 CFPB Fair Lending Report http://files.consumerfinance.gov/f/documents/201604_cfpb_Fair_Lending_Report_Final.pdf

2015 Interagency Fair Lending Hot Topicshttp://consumercomplianceoutlook.org/outlook-live/2015

ABAToolbox on Fair Lendinghttp://www.aba.com/ABA/Toolbox/FairLending/FairLending_Tool3r.pdf

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Thank You

Erica M. Torres, CRCMSenior Manager, Regulatory Compliance Services

617-261-8121etorres@wolfandco.com