You may be aware that the Consumer Finance Protection Bureau is introducing a new expanded review process that includes three separate reviews. What you may not know is that the potential risks associated with the Home Mortgage Disclosure Act will now involve much more than unsupported accusations of unfair lending practices.
In the past, regulators conducted different types of reviews that focused on the lending patterns of minority applicants as they were represented in the overall minority distributions of the Metropolitan Statistical Areas in which the lender operated. In addition, part of the Fair Lending exam concentrated on the accuracy of the HMDA data. If it was not accurate based on the sample files selected, the lender was required by previous regulators to conduct a HMDA "full data scrub."
These scrubs, if you have never had the pleasure of undergoing one, require that EVERY application taken be reviewed, and not just for race, sex and ethnicity. Each step of the process required by the Equal Credit Opportunity Act has to have been completed properly, and importantly, you must be able to demonstrate that it was completed properly. For example, if your company is in the habit — as many are — of just shoving loan applications that were never followed up on into the processor’s drawer as cancelled or withdrawn, you will have a problem. If you have not been sending out “Notices of Incompleteness” and as a result, don’t have evidence that you notified those applicants within 30 days of the application of your decision, you have a problem.
Now the CFPB has expanded the review process to include three different reviews; an ECOA Baseline Review, an ECOA targeted review and a HMDA Data Integrity Review.
The description of these reviews tells me that the CFPB is going to take HMDA much more seriously than previous regulators. The issue is much greater than the million plus dollars you will spend cleaning up your data after a scrub. The bigger problem is, "What is this inaccurate data going to tell the regulators when they conduct a Baseline Review?"
The ECOA Baseline Review is a comprehensive audit of your organization’s policy, procedures and management system focused entirely on Fair Lending. It is interesting, and potentially harmful, that they call it a Baseline Review. This implies that there is some minimum standard that lenders must meet when they are conducting this review or, as the description implies, regulators will proceed with further audits and testing.
But just what is this baseline? Perhaps, to be fair to lenders, the CFPB should give a hint as to what is an acceptable result. If lenders know what an acceptable baseline is, they can be prepared to either demonstrate that they meet the baseline, or that they have a plan in place to address any issues.
And what data are they going to use? The data the lender filed a year before which may not reflect current programs, processes or management actions? When is the CFPB going to conduct this test? Will it be after the HMDA data for the previous year is made available to everyone? Based on the terminology used, I gather it will be the previous year’s population of data that will be used to create an applicable baseline.
So what’s a lender to do? First and foremost, a lender needs to be aware of what their data shows. That mean lenders should be much more familiar with what their data is saying than the CFPB is. That’s a no-brainer. Lenders should be not only testing the accuracy of the data regularly, but looking to see if it really reflects the processes they have in place.
Secondly, lenders should be analyzing their data. There are resources available that will allow you to compare your data to all other lenders months before official HMDA is released to the public. Smart lenders will begin testing the data, analyzing the results and comparing themselves to the industry as soon as possible. Why wait for the CFPB to tell you whether or not your meet their baseline? Be one step ahead of the regulators. Do your homework and be in a position to tell them that you meet the baseline. It’s simply common sense!