When a bank faces a regulatory fair lending review, it's crucial to understand the key pressure points and how to address them effectively. Often, banks seek assistance from outside experts to navigate this complex process. This post outlines what to expect during such an inquiry and what role experts like Premier Insights, Inc. play.
Key Pressure Points in a Fair Lending Inquiry
- Data Collection and Formatting:
- Regulators often request a large amount of data related to underwriting and loan decisions.
- Ensuring this data is accurately collected, properly formatted, and readily accessible is critical.
- The data often includes credit scores, debt-to-income (DTI) ratios, loan-to-value (LTV) ratios, and other relevant factors loan decision factors.
- Statistical Analysis:
- A core component of fair lending reviews often involves statistical analysis to identify potential disparities in lending decisions.
- This analysis examines various factors influencing loan approvals and denials, while controlling for objective criteria.
- Regulators may focus on comparing outcomes for different racial groups, requiring careful coding of applicant data.
- Underwriting Variables:
- The underwriting process involves numerous factors, and regulators scrutinize how these factors are applied.
- Banks must demonstrate that their underwriting decisions are based on objective factors and consistent policy guidelines.
- Particular attention is paid to how credit scoring systems and decision support tools are used.
- Overrides & Exceptions:
- Banks may (and often do) deviate from standard credit policies, creating an “override” or “exception”.
- Regulators will examine these overrides to ensure they are justified and do not result in discriminatory outcomes.
- This includes analyzing both "low-side" overrides (approvals that deviate from policy) and "high-side" overrides (denials that deviate from policy).
- Addressing Disparities:
- If statistical analysis reveals disparities, banks need to be prepared to explain them.
- This involves demonstrating that the disparities are due to legitimate, non-discriminatory factors such as creditworthiness, income, or loan characteristics.
- Regression analysis is commonly used to assess the independent impact of various factors, including race, on loan decisions.
Role of Outside Experts
- Data Management and Preparation:
- Experts assist in assembling and formatting data for submission to regulators.
- This includes ensuring data accuracy and completeness and uploading it to the regulator's designated platform.
- Statistical Analysis and Modeling:
- Experts conduct statistical analyses to assess fair lending compliance.
- This involves using techniques such as regression analysis to identify potential disparities and assess the impact of various factors on loan decisions.
- They also create variables from the data that seem pertinent and include them in the models.
- Objective Evaluation:
- They can provide an objective assessment of the bank's lending practices, helping to identify areas of potential concern.
- Documentation and Reporting:
- Experts prepare reports documenting the analysis and findings for submission to regulators.
- This includes providing technical specifications and explanations of the data and analysis.
- They also supply the programming code used to produce the analysis.
- Override Analysis:
- Experts analyze override codes to determine whether they are consistently applied and justified by objective criteria.
- This helps ensure that overrides do not disproportionately benefit or disadvantage certain groups of applicants.
By understanding these pressure points and leveraging the expertise of firms, banks can navigate regulatory fair lending inquiries more effectively and demonstrate their commitment to fair and non-discriminatory lending practices.
Premier Insights, Inc. can play a crucial role in this process. With over 30 years of experience in the industry, and being involved in numerous regulatory and enforcement inquiries, they have the expertise and knowledge to assist banks in navigating the complexities of fair lending regulations. Their team of seasoned professionals is adept at providing thorough analyses, preparing detailed reports, and ensuring compliance with regulatory standards. By partnering with Premier Insights, Inc., banks can benefit from their extensive experience in handling these matters.