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Pricing of Loans

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					                      HMDA Outlier
                    Fair Lending Project
                          November 16, 2010

              Tara L. Oxley, Senior Fair Lending Specialist
           Lena Patmon, Examination Specialist, Fair Lending




7/8/2011    Division of Supervision and Consumer Protection    1
                     HMDA Outlier Fair Lending Project
                                  Background
           • Project began with the review of 2004 Home Mortgage
             Disclosure Act (HMDA) data to identify institutions with a
             higher risk of pricing or denial discrimination.

           • Outlier institutions receive increased scrutiny to determine
             whether large disparities are due to legitimate
             pricing/underwriting factors or discrimination.

           • A very small number of FDIC-supervised banks are identified as
             Outliers.

           • A small number of Outliers actually result in discriminatory
             findings.
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                    HMDA Outlier Fair Lending Project
                     Identification of Outliers
           • Fair Lending team of economists rely on bank-reported
             HMDA data to identify institutions with large pricing
             and/or denial rate disparities.
           • Screens compare each FDIC-supervised institution to all
             other FDIC-supervised institutions.
              • Screens, for each institution, are run for each product and
                compare racial/ethnic minorities or female borrowers to
                non-Hispanic white or male/joint borrowers.
              • Screens are based on disparities in the:
                  1. Incidence of higher-priced loans
                  2. Average rate-spread on higher-priced loans
                  3. Incidence of HOEPA loans
                  4. Percent of denied applications
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                    HMDA Outlier Fair Lending Project
                     Identification of Outliers
           Important Facts to Remember:

           • HMDA data accuracy is vital. If HMDA data is
             determined to be invalid, the institution must scrub its
             LAR and resubmit, normally within 60 days.

           • Analyzing HMDA higher-priced loans is only a starting
             point. The real focus of our fair lending review will be
             the actual note rates and fees charged to all borrowers.
                  • Analysis of interest rates and fees, not APR.


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                    HMDA Outlier Fair Lending Project
                          The Outlier Review
           If your institution is flagged as a HMDA Outlier:
           Don‟t panic! A large percent of outlier reviews result in
           no evidence of discriminatory pricing or underwriting.
           • Each outlier institution review begins with the
              institution receiving a notification letter and detailed
              Information Request from the FDIC.
           • The Information Request is a targeted request for
              information about the institution‟s credit practices for
              the specific loan product during the time period under
              review.
           • Correct and comprehensive information is vital to the
              process. Inaccurate or incomplete data or information
7/8/2011      will only delay the process.                               5   5
                     HMDA Outlier Fair Lending Project
                          The Outlier Review
           Criteria Interview (Pricing or Underwriting)
           • If a statistically significant disparity remains after
              analysis of the institution‟s response to the Information
              Request, we will conduct an interview with the person
              who is most knowledgeable about the loan product.
           • The interview will focus only on the credit policies and
              practices for the targeted loan product during the review
              period.
           • The interviewee will provide the FDIC with the factors
              considered in pricing or underwriting the targeted loans.
           • Providing correct and comprehensive information is
              vital to the analysis.

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                    HMDA Outlier Fair Lending Project
                         The Outlier Review
           Gathering Loan-Specific Data
           • If the interview identified discretion in any part of
             pricing (or underwriting), loan-specific data will be
             gathered for each one of the pricing (or
             underwriting) factors identified by the institution.
           • The institution may be asked to provide the loan
             data in an electronic format.
           • Or FDIC examiners may come into the institution
             and perform a manual file review to obtain
             necessary data.
              • Where data is not available, it cannot be
7/8/2011         considered in our analysis.                       7   7
                   HMDA Outlier Fair Lending Project
                        The Outlier Review
           Preliminary Regression Analyses
           • Once the FDIC has the electronic data for each loan
              in the review, economists conduct statistical
              analyses of the data.
           • The analyses will determine if the initial disparity,
              between the target and control borrowers‟ loans,
              can be explained by those factors identified by the
              institution during the criteria interview.




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                    HMDA Outlier Fair Lending Project
                         The Outlier Review
           15-Day Letter
           • If the analysis continues to identify a statistically
             significant disparity, after controlling for all factors
             identified by the bank, the FDIC will present the
             findings in a “15-Day Letter.”
           • The 15-Day Letter provides the institution with a
             detailed summary of our statistical analysis.
           • The 15-Day Letter gives the institution an opportunity
             to provide the FDIC with any additional information
             pertinent to the analysis.



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                        HMDA Outlier Fair Lending Project
                      Finding of Discriminatory
                          Lending Practices
              If, following a review of any additional information
              provided in the response to the 15-Day Letter, a
              statistically significant disparity remains between the
              target and control borrowers‟ loans, the FDIC will take
              the following action:

           • Cite a violation of fair lending laws and regulations.

           • Refer the matter to the appropriate federal enforcement
             authority.


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                     HMDA Outlier Fair Lending Project
           How to Lessen Your Chances of Being Flagged as an Outlier
                        - Lessons Learned -

           1. Limit discretion in pricing or underwriting, and ensure
              that such limited discretion is exercised.
           2. Provide underwriters/loan officers specific written
              guidance on factors that should be considered when
              underwriting/pricing loans.
              • If overages are permitted, understand how such
                   overages are calculated.
           3. Know and understand the lending activities of any
              affiliates/subsidiaries.
           4. Monitor any areas of discretion or fair lending risk.



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                     HMDA Outlier Fair Lending Project
           How to Lessen Your Chances of Being Flagged as an Outlier
                        - Lessons Learned -

           5. Ensure that applicants are informed about all loan
              products they qualify for and document an applicant‟s
              choice of lending unit/loan product to avoid concerns of
              „steering.‟
           6. Monitor third-party (broker) practices for discriminatory
              lending practices.
           7. Develop Special Purpose Credit Programs, as detailed
              under ECOA, for the benefit of specific groups of
              consumers in meeting their identified credit needs.




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                      HMDA Outlier Fair Lending Project
           Steps to Take to Expedite Outlier Reviews
                         - Lessons Learned -
           1. Verify the accuracy of your data (HMDA or otherwise)
              before you submit it.
              • Ensure there is only one place that maintains
                  electronic data.
           2. Be accurate and comprehensive in your timely responses
              to FDIC requests.
              a.   At the onset, identify all factors that were used to
                   price/underwrite the loans at issue, and have documentation that
                   substantiates such criteria. Raising new factors later on will
                   only cause delays.
              b.   Clearly identify different lending channels within your
                   institution where the targeted loan product is underwritten or
                   priced differently.
              c.   Clearly identify any other types of loans that were
                   underwritten/priced differently (i.e., employee loans, workout
7/8/2011           loans, etc.).                                              13 13
                      HMDA Outlier Fair Lending Project
           Steps to Take to Expedite Outlier Reviews
                        - Lessons Learned -
           3. Be prepared for the pricing/underwriting criteria
              interview in order to provide clear, accurate, and
              complete responses.
                • The FDIC will tailor its review based on these
                    responses.
           4. Ask clarifying questions at any time during the process.
           5. If pricing differences exist by branch/market/region,
              have written policies that indicate as much.
           6. If pricing of a loan is priced based on certain pricing
              factors, the loan file should clearly reflect these pricing
              factors.



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