Why Benchmarks Matter: Is Your Fair Lending Analysis Short or Tall?
Fair Lending compliance requires that you understand your internal loan data. It's also important to understand how your data compares to others' data. For a complete awareness of the story your data tells, you need to benchmark. To learn about benchmarking, as well as 5 Fair Lending risk factors to consider, read on.
You should analyze your financial institution's data “to assist in evaluating whether a prohibited basis was a factor in an institution’s credit decision,” according to the Interagency Fair Lending Exam Procedures.
However, it is not enough to only compare your organization’s internal data. To gain a more complete understanding, you have to compare your data against others' data.
This provides valuable contextualization of your performance. You should review your data against both national benchmarks and more local benchmarks.
Knowing your own height is one thing. How do you know if you are short or tall? The important context provided by comparison is exactly why benchmarking is valuable. Looking at these pictures of the youth basketball team, it becomes clear how important it is to have a full picture.
As you're evaluating your data, below are the five primary Fair Lending risk factors to consider.
5 Risk Factors Identified in the Interagency Fair Lending Exam Procedures
Below are 5 common risk factors outlined in the Fair Lending Exam Procedures. Is your financial institution proactively analyzing your data to identify risks in each of these areas? Each of the Fair Lending risks detailed below require some form of analysis.
- Underwriting Risk
- Indicators of Underwriting Risk: “Substantial disparities among the approval/denial rates for applicants by monitored prohibited basis characteristic.”
- Pricing Risk
- Indicators of Pricing Risk: “Substantial disparities among prices being quoted or charge to applicants who differ as to their monitored prohibited basis characteristic.”
- Steering Risk
- Indicators of Steering Risk: “Significant differences in the percentage of prohibited basis applicants in loan products or products with specific features relative to control group applicants.”
- Redlining Risk
- Indicators of Redlining Risk: “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.”
- Marketing Risk
- Indicators of Marketing Risk: “Proportion of prohibited basis applicants is significantly lower than that group's representation in the total population of the market area.”
Having disparities, when comparing Prohibited Basis Groups (e.g., Blacks, Females, Hispanics) to a Control Group (White, Male, Non-Hispanic), is very common. In fact, it is more rare not to see disparities when doing raw comparisons. However, the size of the disparity and the reasons behind the disparity are unique to the financial institution.
Reviewing your loan data to explore the risk areas above is important. However, it is not the only step your financial institution should employ. You also need to consider what is going on in and around your market area.
HMDA data provides a treasure trove of opportunities for comparisons to assess your financial institution’s performance within the industry. With this data, we can ask and answer questions like, "Is your denial rate high or low in comparison to peers and market benchmarks?"
In other aspects of life, like academics and athletics, comparing our performance to our peers' helps provide insight and awareness. You can achieve similar insight by comparing your institution's data, and HMDA data in particular, to benchmarks.
In order to get the complete picture, you need to benchmark.
Ncontracts Viewpoint: For the past three years, the FFIEC has released the HMDA in the middle of September. Great insights can be gained by incorporating this data into your risk assessments and data analysis. How do your numbers stack up compared to your market's?
The regulators are increasingly data-centric. They will be analyzing and comparing your data to others in your chosen market. You should take the time to explore your data and see what they will see. The best defense is a good offense, so be proactive in your comparisons this fall.
Ncontracts works with over 450 financial institutions each year to analyze their data and help our clients understand where risk may exist. We can help you conduct these critical comparisons.
- Interagency Fair Lending Examination Procedures: http://www.ffiec.gov/pdf/fairlend.pdf
- 2013 FFIEC Press Release (9/18/13): http://www.ffiec.gov/press/pr091813.htm
- 2012 FFIEC Press Release (9/18/12): http://www.ffiec.gov/press/pr091812.htm
- 2011 FFIEC Press Release (9/22/11): http://www.ffiec.gov/press/pr092211.htm