HMDA data provides powerful insight, but outlying data raises a red flag for examiners.
Ensuring correct data is submitted the first time and taking advantage of interagency fair lending guidance are just two ways to keep examiners happy and the credit union compliant.
The Federal Financial Institutions Examination Council (FFIEC) in September released HMDA data for 5,683 U.S. financial institutions on 12.9 million home loan applications in 2018. The report includes 48 data points, including many new ones, that help financial institutions, governments, mortgage experts, and more assess loan practices related to ethnicity, race, sex, and age of borrowers.
The data set contains powerful insights. For example, whereas the number of overall loans rose slightly for African-American borrowers and Hispanic borrowers — 6.7% and 8.9%, respectively — the FFIEC noted these two groups continued to experience higher denial rates for family, owner-occupied conventional home loans.
NCUA regulators use the HMDA data set to determine which federal credit unions might require fair lending exams and off-site supervision contacts over the next year. According to credit union lenders, a sharper focus on a variety of factors — including data quality, fair lending management, and outside vendors — can go a long way toward avoiding the headaches of an NCUA exam.
Here are eight tips and best practices to help credit unions adhere to fair lending guidelines.
1. Make sure the credit union has a centralized management program for fair lending compliance.
CU QUICK FACTS
HQ: Live Oak, TX
Data as of 09.30.19
12-MO SHARE GROWTH: 11.4%
12-MO LOAN GROWTH: 5.1%
Fair lending compliance stretches across mortgage lending, commercial lending, consumer lending, and collections, so credit unions must ensure fairness and consistency across all business units.
“We find centralization helps improve processes,” says Victor Williams, vice president of lending at Randolph-Brooks Federal Credit Union ($9.59B, Live Oak, TX). “From a control perspective, centralized decisioning is key. More people involved in different processes requires more testing to ensure everybody is operating to the same standard.”
2. Focus on clean data.
The NCUA uses a risk-based approach for exams, and multiple errors on HDMA filings can serve as red flags. Generally, regulators are looking for data that falls outside the normal range for pricing, denials, withdrawals, or lending terms, but even honest mistakes or omissions can lead to closer examinations.
CU QUICK FACTS
Fort Knox FCU
HQ: Radcliff, KY
Data as of 09.30.19
12-MO SHARE GROWTH: 8.1%
12-MO LOAN GROWTH: 0.3%
Charles “Chuck” Eads, vice president of lending at Fort Knox Federal Credit Union ($1.65B, Radcliff, KY), says the NCUA examined his program because the credit union used “information was not provided” for a disproportionate percentage of government monitoring information (GMI) on loan applicant demographics.
“Be sure your lending teams are in sync with your compliance teams when it comes to your HMDA reporting,” Eads advises. “Examiners look for data outliers in your HMDA LAR [loan/application register] to identify potential gaps in processes and training and will select institutions for a specialized Fair Lending Audit based on that data.”
Most mistakes are made at the point of input. For example, if an applicant reports an annual income of $120,000, but it is input as monthly income, it will come across as $1.44 million. Lenders should scrutinize outliers related to debt-to-income ratios, loan amounts, and other factors.
“If you have a secondary review process, make sure the data quality of that information is accurate,” says Erick Martinez, assistant vice president of lending compliance at Randolph-Brooks.
3. Know your lending processes.
Examiners look for written fair lending policies and procedures, periodic risk assessments, employee training, ongoing monitoring, audit and review processes, and adequate oversight by management and the board of directors. According to Martinez, it’s key that whoever will speak to the examiners clearly understands those processes to eliminate any confusion.
“The examiner might not be familiar with your credit union,” Martinez says. “Having somebody who’s familiar with your processes, policies, procedures, monitoring, and testing is really beneficial.”
Eads at Fort Knox FCU advises credit unions to have clear policies for lenders and underwriters on counteroffers versus denials (adverse action notices).
“Examiners specifically mentioned that many institutions blur the line between a counteroffer and a withdrawn loan,” Eads says. “Some institutions have unusually high loan withdrawn rates because lenders do not want to offend their members with a denial, so they simply withdraw the application when it cannot be granted exactly as requested.”
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4. Know the credit union’s story and how to articulate it.
Examiners are keenly interested in the credit union’s demographic profile and how that relates to the cooperative’s metropolitan statistical area (MSA).
“If the area the credit union serves is fairly homogeneous, the story is a little bit easier to tell,” says Martinez at Randolph-Brooks. “If a credit union has a very narrow field of membership, then it might end up with outliers as compared to others within the area.”
5. Make marketing, collections, and any related functions part of the overall process.
From a process perspective, an examiner focuses not only the credit union’s HMDA data but also the organization’s holistic approach to how it originates, sells, prices, and delivers loans.
“How you market your mortgage loans could be an area of focus for the Office of Consumer Protection (OCP) review,” Martinez says.
The Many Faces Of Fair Lending Federal Regulations
Multiple federal laws and regulatory agencies govern fair lending practices including:
Equal Credit Opportunity Act (ECOA), Regulation B, is aimed at preventing discrimination for all parts of credit processes, including the extension of credit to small businesses, corporations, partnerships, and trusts.
HMDA, Regulation C, requires financial institutions to compile and disclose data about home loans, home improvement loans, and refinancing related to applications, originations, and purchases.
The Fair Housing Act is administered by NCUA and Department of Housing and Urban Development regulations and focus on discrimination in all aspects of residential real estate loans.
6. Understand vendor relationships in the mortgage manufacturing process.
Third parties help credit unions offer beneficial and necessary services to their members. However, the more a credit union outsources, the more complicated it becomes to tell the credit union’s story and what its doing.
“If you do everything in house, you have more things within your control,” Martinez says. “If you’re using third parties to help you process, close, or underwrite, to what extent do those third parties have fair lending controls?”
Examiners look at that. So, be ready with an answer.
7. Make sure an outside analytics vendor understands the credit union’s data.
“The biggest challenge a third-party analytics firm would have is around the quality and completeness of the data the credit union is able to provide,” says Eads at Fort Knox FCU. “Some pre-work might be needed around to get the insight you are looking for.”
According to Eads, Fort Knox FCU keeps its analytics in-house because it has the resources and people to do it right. Adds Williams, who has reviewed a number of software products from analytics vendors, all have their strengths and weaknesses.
“There are a lot of vendors that specialize in different products, so you have to take the time to understand who they are, who they support, and does what they offer culturally fit within your shop?” Williams at Randolph-Brooks says. “For some, you need some sharp data analysts within your shop to get the data in and interpret it. Others, are a little more user friendly and you don’t need a highly skilled person with a PhD in statistical or quantitative analysis.”
8. Don’t Reinvent The Wheel
Lastly, Martinez says to take advantage of the tools that are out there to self-assess the credit union’s lending compliance program.
“Leverage what’s out there as far as guidance from the regulators,” Martinez says. “There’s public Interagency Fair Lending Examination Procedures that the examiners use across all lending institutions. Leveraging these exam procedures and using them as a checklist to make sure your fair lending program meets examiner expectations is a good process to have in place.”