Ottoville Banking Company
Fair Lending & Comparative File Review
April, 20xx
(Final Report)
The CFPB’s exam procedures encourage Institutions to conduct self-evaluations also known as comparative file reviews to assess compliance with the fair lending laws. The exam procedures give information regarding sample size and content for the self-evaluations in order for the agency to consider conducting a “Streamlined Exam” for the Institution.
Scope of Review
The scope of this review consisted of comparisons of credit applications and denials from the Institution's real estate and consumer loan portfolios. The purpose of the review was to determine underwriting qualifications ABC Institution regards as significant for extending credit and to determine whether these standards were applied uniformly during the credit-granting process, keeping in mind fair lending standards.
Market and Demographic Information
ABC Institution primarily conducts business within Blue, Purple, Green, Orange, Red, and Pink counties in ABC State. Blue County and Green County are part of the Lavendar Metropolitan Statistical Area (Code: xxxx) and Red County is part of the Sepia Metropolitan Statistical Area (Code: xxx).
The chart that follows summarizes the make-up of the population by race of each of the counties within the Institution’s primary assessment area, as well as totals for the assessment area and the state of ABC State. While specific counties within the assessment area do show differences, the averages for the assessment area are very much in line with the state of ABC as a whole. What these charts indicate is that the Institution does have a minority group, based upon race (Black), which does make up a large percentage of the population of its assessment area.
|Total Pop. |White not Hispanic |Hispanic |Black |Amer. Ind. |Asian | | |Blue |58,345 |51,694 |88.6% |4,609 |7.9% |1,225 |2.1% |292 |0.5% |117 |0.2% | | | |Purple |81,778 |75,563 |92.4% |3,598 |4.4% |1,390 |1.7% |409 |0.5% |164 |0.2% | | | |Green |665,027 |353,129 |53.1% |23,941 |3.6% |271,996 |40.9% |2,660 |0.4% |9,310 |1.4% | | | |Orange |90,399 |75,754 |83.8% |11,029 |12.2% |1,898 |2.1% |542 |0.6% |542 |0.6% | | | |Red |117,293 |92,544 |78.9% |7,741 |6.6% |14,075 |12.0% |821 |0.7% |938 |0.8% | | | |Pink |68,742 |62,143 |90.4% |1,169 |1.7% |4,537 |6.6% |206 |0.3% |206 |0.3% | | | |Assessment Area |1,081,584 |710,827 |65.7% |52,087 |4.8% |295,122 |27.3% |4,930 |0.5% |11,278 |1.0% | | | |ABC State |4,708,708 |3,201,921 |68.0% |150,679 |3.2% |1,238,390 |26.3% |23,544 |0.5% |47,087 |1.0% | | | |
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➢ Question: The demographics above show that there is a representative sample of minorities by race, however, the sample pulled for this comparative file review did not indicate that people of color have applied at the Institution for real estate loans. Could management please explain?
➢ Management Response: ABC Institution does very little advertising, but when it does, the local newspapers are the most common medium used and these papers would reach all households within the six counties in our assessment area. The Institution has also utilized statement stuffers covering loan products that would reach all borrowers. In addition, our staff has conducted education sessions at the schools on banking services. Management will discuss whether there are other medium that might more specifically target and reach other applicants. We will also consider contacting church leaders to see if the Institution can assist in some educational programs for their congregation. The Institution employs minorities as well.
Next we examined the makeup of the assessment area based upon age. The following charts show the distribution of the population by age of each the counties within the Institution’s assessment area and the state of ABC State as a whole:
Blue County Purple County
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Green County Orange County
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Red County Pink County
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ABC State United States
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In reviewing these charts it appears that all of the counties within the assessment area have a relatively regular distribution when compared with the state of ABC State and the entire United States. Therefore, it does not appear that there is any specific age group to include in the focus of this review.
This analysis reviewed applications for both females and males as well as married and non-married applicants. The target group and control group samples were selected from the institution's adverse action files, LAR and a system generated report showing new loans originated in 2010 and 2011. These data bases showed a total of 182 loans in 2010 and 134 in 2011. A handful of loans for 2009 were also included.
A total of 108 loan applications were reviewed and considered for this report. The originated loans were pulled covering November, 2009 through March, 2011 (In order to get as close to a rolling two year sample as possible). The denied applications were pulled from the time period of January 1, 2010 through March, 2011. The current sample was comprised of the following applicants:
➢ 28 females applying individually (1 denied; 27 approved)
➢ 52 males applying individually (3 denied; 49 approved)
➢ 28 joint applicants (9 denied; 19 approved)
Methodology Employed
Brode Consulting Services, Inc. adapted the federal financial regulatory agencies' procedures for fair lending examinations of financial institutions into a lending comparative analysis worksheet. The worksheet was used to accumulate and compare data gathered. The completed worksheets are attached to this report.
The information to follow consists of a summary analysis including any findings or notes related to the Institution's compliance with fair lending guidelines as well as any recommendations to management as to what the agencies will be considering and, if applicable, what management may want to consider in order to be prepared.
Fair Lending Compliance Review Risk Rating Satisfactory
Summary Analysis
Upon receipt of management responses of the issues listed below, Brode Consulting will determine whether additional comments need to be made to this summary analysis.
Loan officers are consistently utilizing a loan memo to document the loan decisioning for loans made and denied.
One of the areas that received special consideration during this review was the rate quoted or given to different applicants. No unusual trend or pattern surfaced. The Institution utilizes a risk-based rate sheet. The lenders are trained that if they deviate from that rate sheet, they must clearly document the mitigating factors that had them charge a higher or lower rate for that specific borrower. In addition, all deviations from the rate sheet must be approved by a supervisor.
➢ In comparing overall average rates given to females (6.9%) and males (7.20%) and joint applicants (6.74%), rates are very comparable.
➢ No unusual trends in rates were identified by product type as well.
➢ Nine loans reviewed that had rate spread (3 for female, 3 for male, 3 for joint)
Management Response: We are pleased that the loan officers are following our pricing guidelines. They are instructed that should they ever deviate from the rate chart, they are to document the reason for their recommended rate. At that time Underwriting will review their rate recommendation. In addition, the senior lending officer reviews all exceptions to rate.
There also appeared to be no unusual trend or pattern in the likelihood of loan approval or denial based on whether the applicant applied individually or jointly; or whether the applicant was female or male.
➢ Average DTI for denied applicants was 38% for female, 35% for male, and 29% for joint.
➢ Average DTI for approved applicants was 26% for female, 29% for male, and 24% for joint.
➢ Average credit scores for denied applicants were 670 for female, 606 for male, and 752 for joint. There was only one female in this group and all but one of the joint applications were withdrawn.
➢ Average credit scores for approved applicants were 698 for female, 698 for male, and 740 for joint applicants.
Management Response: Management has reviewed the issues identified below during this review and has provided specific responses as well as the following general response in order to have future reviews result in less errors:
1. The staff will continue to be required to complete on-line compliance training sessions.
2. The staff and board will continue to receive fair lending training on an annual basis.
3. The staff will receive “classroom” training as a group to cover their compliance responsibilities.
4. The Institution’s pre-closing review will continue. These reviews result in an officer “score” for accuracy and completeness. This score is posted publicly on the Institution’s intranet.
5. Incentives are awarded for high officer scores.
6. Exception reports are discussed with officers, are discussed at loan officer meetings and will begin to be provided to the directors.
7. Scores and exception reports are utilized during loan officer and staff performance reviews.
8. We will begin the process of having loan officers correct their own errors by notations and/or memos to the file. This will assist in officers understanding the correct compliance standards.
➢ Finding: The application for Mr.Smith included marital status for this unsecured, individual credit request.
➢ Management Response: This has been covered during training sessions and will be repeated in future training sessions.
➢ Recommendation: Many of the applications were found to be incomplete (although some of the information was found elsewhere in the file); it is recommended that training include the importance of a complete application.
➢ Management Response: Management concurs
➢ Finding: A full real estate application was not utilized for the construction loan for Mr. Snow.
➢ Management Response: Management concurs
➢ Question: Is it a typical or allowable practice to get a credit report on a spouse when they are not on the loan? Credit report was marked "non-borrowing spouse".
➢ Management Response: Loan officers will be reminded that they should not pull credit on a non-borrowing spouse.
➢ Recommendation: Loan officers should be reminded to document the REASON for a withdrawn application. Those that were marked were quite clear; others had no reason notated.
➢ Management Response: Management concurs
➢ Question: For auto loans, it appears that loan officers are always using the retail value to calculate LTV, which is the highest of the values listed by NADA. What is the Institution’s policy?
➢ Management Response: The system is supposed to be pulling wholesale or loan value. This will be corrected.
➢ Note: On the application for Joe & June Jones, the government monitoring information had the genders backwards.
➢ Management Response: The correction will be notated on the application.
➢ Question: On this same loan for Jones, the loan officer was Sue Jones. Is she a relative of the borrowers?
➢ Management Response: No, no relationship at all.
Other types of charts/information that could be useful for your report:
Comparison of Gross Monthly Income – Gender Analysis
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Comparison of Total Debt to Income – Gender Analysis
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Comparison of Decisioning Score – Gender Analysis
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Comparison of Rate – Gender Analysis
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Exam Guidelines
The information below is directly from the CFPB’s exam procedures. This information is important to the Institution and may want to be considered prior to the next fair lending exam. Many of the items could be utilized in fair lending training.
1. Understanding Credit Operations
Before evaluating the potential for discriminatory conduct, the examiners will review information about the Institution and its market to understand our credit operations. Specifically, they will look at:
• The types and terms of credit products offered, differentiating among residential, consumer and other categories of credit
• The volume of, or growth in, lending for each of the credit products offered
• The demographics (i.e., race, national origin, etc.) of the credit markets in which the institution is doing business
• The institution's organization of its credit decision-making process, including identification of the delegation of separate lending authorities and the extent to which discretion in pricing or setting credit terms and conditions is delegated to various levels of managers, employees or independent brokers or dealers
• The types of relevant documentation/data that are available for various loan products and what is the relative quantity, quality and accessibility of such information (i.e., for which loan product(s) will the information available be most likely to support a sound and reliable fair lending analysis).
2. Evaluating the Potential for Discriminatory Conduct
Based on consideration of the foregoing factors, the examiners will request information for all residential and other loan products considered appropriate for scoping in the current examination cycle. In addition, wherever feasible, examiners will conduct preliminary interviews with the lender's key underwriting personnel. Using the accumulated information, the examiner will evaluate the following, as applicable:
• Underwriting guidelines, policies, and standards.
• Descriptions of credit scoring systems, including a list of factors scored, cutoff scores, extent of validation, and any guidance for handling overrides and exceptions.
• Applicable pricing policies and guidance for exercising discretion over loan terms and conditions.
• The institution's corporate relationships with any finance companies, subprime mortgage or consumer lending entities, or similar institutions.
• Loan application forms
• HMDA/LAR or loan registers and lists of declined applications
• Description(s) of databases maintained for loan product(s) to be reviewed, especially any record of exceptions to underwriting guidelines
• Copies of any consumer complaints alleging discrimination and loan files related thereto
• Descriptions of any compensation system that is based on loan production or pricing
• Compliance program materials (particularly fair lending policies), training manuals, organization charts, as well as record keeping and any monitoring protocols
• Copies of any available marketing materials or descriptions of current or previous marketing plans or programs.
Review Residential Loan Products
Divide home mortgage loans into the following groupings: home purchase, home improvements, and refinancing.
Identify Residential Lending Discrimination Risk Factors
• Review the lending policies, marketing plans, underwriting, appraisal and pricing guidelines, broker/agent agreements and loan application forms for each residential loan product that represents an appreciable volume of, or displays noticeable growth in, the institution's residential lending.
• Review any available data regarding the geographic distribution of the institution's loan originations with respect to the race and national origin percentages of the census tracts within its assessment area or, if different, its residential loan product lending area(s).
• Conduct interviews of loan officers and other employees or agents in the residential lending process concerning adherence to and understanding of the above policies and guidelines as well as any relevant operating practices.
Indicators of potential disparate treatment in Underwriting such as:
Substantial disparities among the approval/denial rates for applicants by monitored prohibited basis characteristic (especially within income categories)
Substantially higher proportion of withdrawn/incomplete applications from prohibited basis group applicants than from other applicants
Loan officer or broker compensation based on loan volume (especially loans approved per period of time)
Consumer complaints alleging discrimination in loan processing or in approving/denying residential loans.
Indicators of Potential Disparate Treatment in Pricing (Interest rates. fees. Or points such as:
➢ Relationship between loan pricing and compensation of loan officers or brokers
➢ Presence of broad discretion in pricing or other transaction costs
➢ Use of a system of risk-based pricing that is not empirically based and statistically sound
Substantial disparities among prices being quoted or charged to applicants who differ as to their monitored prohibited basis characteristics
Indicators of Potential Discriminatory Redlining such as:
Significant differences, as revealed in HMDA data, in the number of loans originated in those areas in the lender's market that have relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents.
Significant differences between approval/denial rates for all applicants (minority and non-minority) in areas with relatively high concentrations of minority group residents compared with areas with relatively low concentrations of minority residents.
Significant differences between denial rates based on insufficient collateral for applicants from areas with relatively high concentrations of minority residents and those areas with relatively low concentrations of minority residents.
Indicators of Potential Disparate Treatment in Marketing of residential products such as:
Advertising patterns or practices that a reasonable person would believe indicate prohibited basis borrowers are less desirable.
Advertising only in media serving non-minority areas of the market.
Marketing through brokers or other agents that the lender knows (or has reason to know) would serve only one racial or ethnic group in the market.
Use of marketing programs or procedures for residential loan products that exclude one or more regions or geographies within the lenders assessment or marketing area that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area.
Using mailing or other distribution lists or other marketing techniques for prescreened or other offerings of residential loan products that:
• Explicitly exclude groups of prospective borrowers on a prohibited basis; or
• Exclude geographies (e.g., census tracts, ZIP codes, etc.) within the institution's marketing area that have significantly higher percentages of minority group residents than does the remainder of the marketing area.
NOTE: Pre-screened solicitation of potential applicants on a prohibited basis does not violate ECOA. Such solicitations are, however, covered by the FH Act. Consequently, analyses of this form of potential marketing discrimination should be limited to residential loan products subject to coverage under the FH Act.
Proportion of monitored prohibited basis applicants is significantly lower than that group's representation in the total population of the market area.
Consumer complaints alleging discrimination in advertising or marketing loans.
Analysis of Potential Discriminatory Marketing Practices.
a. Pre-approved solicitations
➢ Determine whether the Institution sends out pre-approved solicitations:
➢ for home purchase loans
➢ for home improvement loans
➢ for refinance loans
➢ Determine how the Institution selects recipients for such solicitations
➢ learn from the Institution its criteria for such selections
➢ review any guidance or other information the Institution provided credit reporting companies or other companies that supply
such lists
b. Media Usage
Determine in which newspapers and broadcast media the Institution advertises.
• identify any racial or national origin identity
associated with those media
• determine whether those media focus on
geographical communities of a particular racial
or national origin character
• Learn the Institution's strategies for geographic and
demographic distribution of advertisements.
➢ Obtain and review copies of the Institution's printed advertising and promotional materials.
➢ Determine what criteria the Institution communicates to media about what is an attractive borrower or an attractive area to cultivate business.
• Determine whether advertising and marketing are the same to racial and
national origin minority areas as compared to non-minority areas.
b. Self-produced promotional materials
Learn how the Institution distributes its own promotional materials, both methods and geographical distribution
➢ Learn what the Institution regards as the target audience(s) for those materials
d. Realtors brokers contractors and other intermediaries
➢ Determine whether the Institution solicits business from specific realtors, brokers, home improvement contractors, and other conduits.
➢ Learn how the Institution decides which intermediaries it will solicit
➢ Identify the parties contacted and determine the distribution between minority and non-minority areas
➢ Obtain and review the types of information the Institution distributes to intermediaries
➢ Determine how often the Institution contacts intermediaries
➢ Determine what criteria the Institution communicates to intermediaries about the type of borrowers it seeks or the nature of the geographic areas in which it wishes to do business.
Compliance Management
The fair lending exam will also entail a review of the Institution's compliance management. The following information is a summary found in the exam procedures. It is offered here for management's review and consideration. Generally, the examiners will focus on:
➢ Determining whether the policies and procedures of the Institution enable management to prevent, or to identify and self-correct, illegal disparate treatment in the transactions that relate to the products and issues identified for further analysis during the exam.
➢ Obtaining a thorough understanding of the manner by which management addresses its fair lending responsibilities with respect to
➢ the institution's lending practices and standards,
➢ training and other application-processing aids,
➢ guidance to employees or agents in dealing with borrowers, and
➢ the Institution's marketing or other promotion of products and services.
Other Issues
To the extent the institution maintains records of loan outcomes resulting from exceptions to its credit underwriting standards or other policies (e.g., overrides to credit score cutoffs), request such records for both approvals and denials, sorted by loan product and branch or decision center, if the lender can do so.
Analyzing Potential Disparities in Terms and Conditions.
Sample composition for a comparison of price and other terms and conditions will initially focus on controlling for two nondiscriminatory variables that can have a significant impact on loan terms: whether the loan was sold and the loan closing date. Other variables, such as household income and loan amount, will be accounted for on a case-by-case basis during the file comparison process.
Compliance Management Analysis Checklist
The agencies will utilize the following checklist to summarize their observations regarding the management of compliance at the Institution.
Lending practices and standards:
a. Principal policy issues
a.
Are underwriting practices clear and similar to industry standards?
Is pricing within reasonably confined ranges with guidance linking variations to risk and/or cost factors?
Does management monitor the nature and frequency of exceptions to its standards?
Are denial reasons accurately and promptly communicated to unsuccessful applicants?
b. Do training, application-processing aids, and other guidance correctly and adequately
describe:
Prohibited bases under ECOA, Regulation B, and the Fair Housing Act?
Other substantive credit access requirements of Regulation B (e.g., spousal signatures, improper inquiries, protected income)
c. Is it specifically communicated to employees that they must not, on a prohibited basis:
➢ Refuse to deal with individuals inquiring about credit?
➢ Discourage inquiries or applicants by delays, discourtesy, or other means?
➢ Provide different, incomplete, or misleading information about the availability of loans, application requirements, and processing and approval standards or procedures (including selectively informing applicants about certain loan products while failing to inform them of alternatives)?
➢ Encourage or more vigorously assist only certain inquirers or applicants?
➢ Refer credit seekers to other lenders?
➢ Waive or grant exceptions to application procedures or credit standards?
➢ Use different procedures or standards to evaluate applications?
➢ Use different procedures to obtain and evaluate appraisals?
➢ Provide certain applicants opportunities to correct or explain adverse or inadequate information, or to provide additional information?
➢ Accept alternative proofs of creditworthiness?
➢ Require co-signers?
➢ Initiate collection or foreclosure?
➢ Basing credit decisions on assumptions derived from racial, gender, and other stereotypes, rather than facts?
➢ Seeking borrowers from a particular racial, ethnic, or religious group, or of a particular gender, to the exclusion of other types of borrowers, on the basis of how "comfortable" the employee may feel in dealing with those different from him/her?
➢ Because of their discomfort or unease in dealing with borrowers from certain racial, ethnic, or religious groups, or of a certain gender, limiting the exchange of credit-related information or their effort to qualify the applicant?
d. Is the institution's market footprint drawn without unreasonably excluding minority areas?
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