Historically, business lending has not been the focus of fair lending reviews during bank examinations. The focus is usually on HMDA reportable applications since government monitoring information (GMI) is available and, therefore, protected and non-protected classes status is readily identifiable. How is that changing today?
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Commercial banks are required under the Community Reinvestment Act (CRA) to serve all segments of the communities in which they operate. This includes making loans to areas and individuals of all income levels, and particularly low and moderate income communities and persons.
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A question that often arises in fair lending regression analysis of lender loan decisioning practices is how special case loans are handled.
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A fundamental assumption in fair lending regression analysis is that the model is correctly specified and contains all the relevant variables.
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Regression analysis is a powerful tool for assessing fair lending risk and performance. As is the case with any tool, however, it must be understood and used correctly. This includes understanding the limitations which in turn defines what conclusions can be drawn from an analysis.
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When preparing to conduct a fair lending regression analysis, the first step is to determine the loan sample to be analyzed. This is usually accomplished by first selecting a particular loan product on which to focus and a time period.
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As we have discussed in previous posts, fair lending regression analysis has become widely used for evaluation of lender practices. While a comprehensive discussion on the subject is unnecessary certainly beyond a blog post, it is important to understand limitations when such analyses are applied to such a critical issue as fair lending.
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A tension exists between a bank meeting its CRA obligations and compliance with other fair lending laws and regulations. This can sometimes present a bank with conflicting priorities.
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In the second installment of this two-part post, we provide some guidance concerning data for fair lending underwriting analysis in the community bank space.
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In Part 1 of this two-part post, we discuss some issues with conducting fair lending underwriting analysis for community banks: challenges which are becoming more acute with the regulatory emphasis on quantification.
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