Evaluating Pricing Discrimination Risk: The Role of HMDA Data

1
Evaluating Pricing Discrimination Risk The
Role of HMDA Data

• Carol Evans
• Special Counsel, Fair Lending
• Board of Governors of the Federal Reserve System
• carol.a.evans_at_frb.gov
• [phone]
• ABA Fair Lending Modeling Symposium
• June 2, 2007
• The views expressed are those of the
  presenter and do not necessarily reflect the
  views of the Federal Reserve Board.

2
Fair Lending Enforcement by the Federal Reserve

• The Federal Reserve rigorously enforces the fair
  lending laws.
• We review all institutions that we supervise
  regularly for fair lending compliance.
• We also perform fair lending reviews outside the
  normal supervisory cycle when we believe they are
  warranted by fair lending risk.

3
If We Determine That an Institution Engaged in
Discrimination, What Do We Do?

• Pursuant to the Equal Credit Opportunity Act, we
  refer the matter to the Department of Justice or,
  in certain circumstances, to HUD.
• We direct the institution to take remedial
  actions and improve its fair lending compliance,
  as appropriate.

4
The New HMDA Pricing Data

• HMDA data alone cannot prove discrimination
  because HMDA data lack many important factors
  that lenders consider in loan pricing.
• But, HMDA pricing disparities highlight concerns
  about pricing discrimination, steering and
  redlining.
• HMDA data also promote fair lending by
  encouraging public discussion, research, and
  lender compliance and outreach.

5
How the Federal Reserve Uses HMDA Pricing Data

• We analyze the HMDA pricing data along with other
  risk factors such as discretionary pricing and
  incentives for loan officers to charge higher
  prices to assess fair lending risk.
• Institutions at risk for pricing discrimination
  will receive targeted pricing reviews.
• During a pricing review, examiners have access to
  all relevant information, not just HMDA data.

6
Risk Factors for Pricing Discrimination

• Broad Discretion in Pricing
• A Relationship Between Loan Officer/Broker
  Compensation and Pricing
• Consumer Complaints
• From the Interagency Fair Lending Examination
  Procedures, www.ffiec.gov/PDF/fairlend.pdf

7
Fair Lending Risk The Role of Discretion and
Incentives

• Pricing discretion and financial incentives to
  charge borrowers more are recognized as potential
  fair lending risk factors.
• Past mortgage pricing discrimination cases
  illustrate the role of these factors.
• It is critical for lenders to effectively manage
  discretion and incentives, wherever they occur in
  the lending process.

8
Past Mortgage Pricing Cases What Lessons Can We
Learn?

• Minorities Charged Higher Discretionary Fees,
  Overages or YSP
• Raised Issue of Lender Liability for Brokers
• Cases Against Prime and Subprime Lenders

9
Getting It Right

• Understand your institutions risk factors
• Where is there discretion?
• Is compensation linked to pricing?
• Other risk areas (underwriting, steering, etc.)?
• Ensure that you have policies, training and
  controls in place to address these issues.
• Validate the effectiveness of your policies and
  controls with robust monitoring.