Mortgage

A Deeper Look at Decisioning

Why a Fair Lending Analysis Must Go Beyond Compliance

The CFPB’s Fair Lending Regulations B and C ensure all loan applicants & borrowers are treated equally. Recent 2021-2022 CFPB interagency regulatory interpretations and amendments emphasize the accuracy of HMDA LAR data, as well as thorough documentation of an institution’s monitoring of potential bias in mortgage lending operations. Are you prepared to illustrate your institution’s evidence of monitoring through formalized reports, detailing internal compliance and operational monitoring of potential risk related to prohibited basis groups (PBGs) to ensure all your decisions treat similarly situated borrowers the same?

Do you really understand how all your decisions are made?

The optimal path to understanding your decision-making begins with an assessment of the entire loan production system. Policies, procedures, and operational documents should be thoroughly reviewed through the lens of the CFPB’s Fair Lending Risks Related to Servicing Interagency Examination Procedures. How effective are your documented policies and procedures in relation to these examination procedures? What policies or procedures should be redesigned and how? What policies or procedures are missing? After you modify your policies and procedures per the assessment, you can then examine the training and communication plans that bring these procedures to life every day in your organization. Is the training effective? How do you assess its effectiveness?

In addition to an assessment of all policies and procedures, a thorough analytical review is necessary to expose all aspects of risk: overt discrimination, disparate treatment, disparate impact, and redlining. Ideally, this analysis should use sophisticated statistical models to uncover and examine the root causes of any risk factors. Only through using regression analysis on underwriting and pricing, as well as conducting matched pairs testing, can you pinpoint the exact areas that need improvement.  The design of this analytical study is critical and requires specialized expertise, not just in statistical modeling, but also a deep understanding of the mortgage regulatory landscape. Additionally, this analysis should include a thorough assessment of the current HMDA data integrity. Where are the gaps in your reporting? This approach will illustrate the potential risks of HMDA LAR inaccuracies in the model structure and HMDA data. By using a holistic approach to the analytical review, you can identify areas that may have been previously unseen or misunderstood.

Finally, this risk assessment must look forward and stress test against the regulations that may still be in development and/or on the horizon, as well as changes in your operational processes. As margins tighten and you reduce staff, how does your risk profile change? By proactively incorporating current regulatory interpretations and those that may be expanded in the future, you can consistently understand your risk profile.

For more information on how you can understand your Fair Lending risk, contact us today at info@richeymay.com.