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  • CFPB Increases HMDA Asset Size Exemption Threshold

    Lending

    On December 31, the CFPB published a final rule to amend the official commentary that interprets the requirements of Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), to increase the asset-size exemption threshold for financial institutions. HMDA and Regulation C require most mortgage lenders located in metropolitan areas to collect and report data about applications for, and originations and purchases of, home loans and refinancings, which the CFPB uses to identify possible discriminatory lending patterns and to assess whether financial institutions are serving the housing needs of their communities. Effective immediately, banks, savings associations, and credit unions with assets of $42 million or less as of December 31, 2012, are exempt from collecting data in 2013. Regulation C requires the CFPB to adjust the asset threshold based on the year-to-year change in the average of the CPI–W, not seasonally adjusted, for each 12-month period ending in November, rounded to the nearest million. During the 12-month period ending in November 2012, the CPI–W increased by 2.23 percent, resulting in an increase in the threshold from $41 million to $42 million.

    CFPB HMDA

  • Special Alert: CFPB and DOJ Announce MOU to Coordinate Fair Lending Enforcement Efforts; CFPB Issues First Annual Report to Congress on Fair Lending Activities

    Consumer Finance

    On December 6, the Consumer Financial Protection Bureau (CFPB or Bureau) and the U.S. Department of Justice (DOJ) announced a Memorandum of Understanding (MOU) to coordinate enforcement of the federal fair lending laws, including the Equal Credit Opportunity Act (ECOA).  Simultaneously, the CFPB issued its first annual Fair Lending Report to Congress as required by the Dodd-Frank Act, which describes the Bureau’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews its fair lending accomplishments. Together, these initiatives demonstrate that the CFPB and DOJ are continuing to work together closely to aggressively enforce the federal fair lending laws.

    Memorandum of Understanding Regarding Fair Lending Coordination

    The new MOU supplements an existing Information Sharing Agreement Regarding Fair Lending Investigations among the DOJ, the U.S. Department of Housing and Urban Development, and the Federal Trade Commission, which allows these fair lending enforcement agencies to share confidential information related to fair lending investigations, screening procedures, and investigative techniques. It also follows a general cooperation MOU that the DOJ and CFPB entered into earlier this year.

    The new MOU focuses on information sharing and referral of matters alleging ECOA violations, but also governs the agencies’ referral processes for other fair lending-related laws and joint fair lending investigations.

    Referral of ECOA Violations to DOJ: The MOU explains the circumstances under which the CFPB will refer potential ECOA violations to the DOJ for further investigation or prosecution. Consistent with the established practice of the prudential federal bank regulators, the MOU requires the CFPB to refer to the DOJ all matters where it has “reason to believe” that one or more creditors has engaged in a pattern or practice of lending discrimination. The CFPB may also refer to DOJ any violation of Section 701(a) of ECOA, including a recommendation that a civil action be commenced if the CFPB cannot obtain compliance from the financial institution.

    Following referral, the DOJ has 60 days to determine whether to proceed with its own investigation. Within that period, the CFPB may not unilaterally commence its own action with regard to the referred violation(s).  Even if exigent circumstances arise during the 60-day review period, the CFPB must first consult with the DOJ before taking independent action.

    The CFPB may also refer to the DOJ possible violations of fair lending-related laws for which the CFPB has no statutory examination or enforcement authority, but for which the DOJ possesses enforcement authority, including the Fair Housing Act and the Servicemembers Civil Relief Act. Despite its lack of statutory authority to enforce these laws, the CFPB’s Supervision & Examination Manual provides resources to identify such potential violations for purposes of referrals to another federal agency.

    Joint Investigations:  With regard to joint investigations, the MOU provides only that “[w]hen appropriate, the DOJ and the CFPB will seek to collaborate on investigations, and conduct joint investigations of entities allowing the Agencies to leverage resources and expertise.” The agreement calls for quarterly meetings to discuss investigative activity, but allows each agency to retain “independent authority to proceed in the manner that it determines is appropriate.”

    Information Sharing:  The MOU describes how the parties have agreed to designate, share, use, and protect as non-public, certain information related to investigations of potential ECOA violations, including confidential supervisory information collected by the CFPB under its supervision and examination authority. The MOU allows for additional case- or investigation-specific information sharing agreements as appropriate, based on a form agreement provided as an attachment to the MOU.  Section 7 of the form agreement indicates that “sharing of any confidential information [between the CFPB and DOJ] under this Agreement does not constitute a waiver of, or otherwise affect, any privilege any agency or person may claim with respect to such information under federal law.” This provision appears to mirror the treatment of confidential information under 12 U.S.C. § 1828(x) that applies to the prudential bank regulatory agencies.

    CFPB’s First Annual Fair Lending Report to Congress

    The First Annual Fair Lending Report of the Consumer Financial Protection Bureau describes the CFPB’s efforts to build its Office of Fair Lending and Equal Opportunity and reviews that office’s accomplishments from July 21, 2011 through July 20, 2012. The CFPB includes among those accomplishments the issuance of “Bulletin 2012-04 on Discrimination in Lending” and the commencement of a number of non-public fair lending investigations, which are ongoing. The Report states that the Bureau continues to develop tools that allow it to identify areas of heightened fair lending risk and to promote efficiency in its supervisory and enforcement efforts.  Earlier this year, in its strategic plan, the CFPB explained that it intends to base its fair lending-related performance on, among other indicators, the number of fair lending supervision activities opened during the fiscal year and the percentage of fair lending cases filed that were “successfully resolved” through litigation, settlement, or default judgment.

    The Report states that federal regulators referred 12 ECOA-related matters to the DOJ from July 21, 2011 through December 31, 2011 and provides a summary of the most frequently cited Regulation B violations found by the federal regulators during examinations of financial institutions. The Report also provides a summary of a study and report by the CFPB to Congress on use of cohort default rates in private education lending, and provides a general status on rulemakings required by the Dodd-Frank Act. The CFPB describes the rulemaking to expand the scope of the data that must be collected and submitted under the Home Mortgage Disclosure Act (HMDA) as being in the “pre-rule stage,” and the Bureau has begun the planning process for new rules concerning data collection and reporting of small, minority- and women-owned business loan data by gathering information from stakeholders.

    BuckleySandler LLP is a national leader in fair lending enforcement, litigation, and compliance.  Attorneys in our Fair and Responsible Banking Team and CFPB Team defend institutions facing fair lending enforcement actions brought by the DOJ, CFPB and other federal agencies, and the firm regularly counsels an array of financial institutions seeking to comply with the full range of federal fair lending laws.

    CFPB Fair Lending SCRA ECOA DOJ HMDA

  • Spotlight on HDMA: Your Institution's Public HMDA Data and What to Do with It

    Lending

    Warrem

    In an annual rite of autumn, on September 18 the Federal Financial Institutions Examination Council released 2011 Home Mortgage Disclosure Act (HMDA) data for U.S. mortgage lenders.  The public data contains information regarding nearly all home mortgage applications acted on in the prior calendar year, designated by loan purpose (i.e., home purchase, home refinance and home improvement).  The HMDA data covers home loan applications made to over 7,600 U.S. financial institutions, including banks, savings associations, credit unions and mortgage companies, and contains information on approximately 11.7 million applications, 7.1 million originations and 2.9 million purchases.

    HMDA data provides a wealth of mortgage industry-related information, including data on application and loan volume, the proportion of loans backed by the Fair Housing Administration and Veterans Administration, and lender concentration in the mortgage market.  However, its most important function and the reason HMDA was enacted is the role the data plays in fair lending enforcement.  Toward this end, the outcome of each home mortgage loan application is classified according to the applicant’s race, ethnicity and gender.  HMDA data further allows analyses based on the site of the subject property, as well as the location of the lender.

    It is important to recognize that while HMDA data alone does not prove or disprove discrimination, it is an important component of fair lending examinations.  According to the Federal Reverse Board, which provides a lengthy analysis that accompanies the annual release of HMDA data:

    Although the HMDA data include some detailed information about each mortgage transaction, many key factors that are considered by lenders in credit underwriting and pricing are not included.  Accordingly, it is not possible to determine from HMDA data alone whether racial and ethnic pricing disparities reflect illegal discrimination.  However, analysis using the HMDA data can account for some factors that are likely related to the lending process.

    In other words, notwithstanding its limitations, HMDA data is often the starting point for regulators seeking indicia of possible discrimination.  Additionally, advocacy groups and the media frequently focus on lending disparities suggested by HMDA data.  These factors, and the very public nature of HMDA data, make it important that lenders fully understand their own data and consider it in the context of what the national HMDA data suggests.

    Here’s a list of the key fair lending-related findings from the 2011 data:

    • Denial Rates - Black applicants and Hispanic-white applicants had notably higher denial rates than non-Hispanic white applicants.  The denial rates for conventional home-purchase loans were 30.9 percent for blacks, 21.7 percent for Hispanic whites, 14.8 percent for Asians, and 11.9 percent for non-Hispanic whites.
    • Higher-Priced Loans - The incidence of higher-priced lending across all products in 2011 was about 3.7 percent, up from 3.2 percent in 2010.  Black and Hispanic-white borrowers were more likely to obtain higher-priced loans than were non-Hispanic white borrowers. 
    • Loan Penetration in Distressed Areas - Lending activity has not yet rebounded in neighborhoods experiencing high levels of distress.  Home purchase lending in census tracts identified by the Neighborhood Stabilization Program as being highly distressed declined by a larger percentage since 2010 than less-distressed tracts. This decline was particularly pronounced for lower- and middle-income borrowers.

    These industry-wide findings help guide the analyses that individual lenders should conduct on their own HMDA data.  Here are three basic statistical reviews that we recommend each lender undertake to better understand what the data shows:

    1. Evaluate the share of applications received from protected class applicants.
    2. Compare denial rates for minority applicants and non-Hispanic white applicants.
    3. Determine the proportion of higher priced loans originated to minority applicants and non-Hispanic white applicants.

    We reiterate that HMDA data alone does not prove or disprove mortgage lending discrimination.  A HMDA review that suggests fair lending concerns should be followed by further statistical analysis that considers credit-related factors that are not part of HMDA, such as credit score and loan-to-value ratios.  Review of individual loan files may also be necessary before making a final determination that there are lending patterns that cannot be explained, and that ameliorative action is necessary.

    Nevertheless, it is important to understand your institution’s raw, public HMDA data and be prepared to defend and follow-up on any lending disparities it may suggest.  Put simply, the best way to avoid getting blind-sided by a regulator, community group, or media representative is to know your HMDA data better than they do.

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    Warren W. Traiger, counsel at BuckleySandler LLP, advises clients on consumer regulatory matters, particularly fair lending and Community Reinvestment Act (“CRA”) compliance. Mr. Traiger is a nationally recognized expert in CRA and fair lending issues. His research and analysis of mortgage lending data has been cited in publications of the Federal Reserve Banks of San Francisco, Boston, and Dallas, the Federal Deposit Insurance Corporation, and in testimony before the U.S. House Financial Services Committee.

    FFIEC FHA HMDA Warren Traiger

  • CFPB and FHFA Partner to Develop National Mortgage Database

    Lending

    The CFPB and the FHFA announced today an agreement to create a National Mortgage Database, the first comprehensive repository of mortgage loan information. The database primarily will be used to support the agencies’ policymaking and research efforts and help regulators better understand emerging mortgage and housing market trends. The database is intended to (i) monitor the health of mortgage markets and consumers, (ii) provide insight on consumer decision making, (iii) monitor new and emerging mortgage products, (iv) consolidate data on first and second lien mortgages for a given borrower, and (v) help policymakers understand consumer debt burden. The press release states that development of the dataset is currently underway and the agencies expect early versions of the full dataset to be complete in 2013. Once completed, the agencies plan to explore opportunities to share database information with other federal agencies, academics, and the public. The database will include information spanning the life of a mortgage loan from origination through servicing and include loan-level data about (i) the borrower’s financial and credit profile, (ii) the mortgage product and terms, (iii) the property purchased or refinanced, and (iv) the ongoing payment history of the loan. The agencies will build the database by matching a nationwide sampling of credit bureau files on borrowers’ mortgages and payment histories with informational files such as the HMDA database and property valuation models. The database will include historical data back to 1998 and will be updated on a monthly basis.

    CFPB Mortgage Origination Mortgage Servicing FHFA HMDA

  • FFIEC Releases 2011 HMDA Data

    Lending

    On September 18, the Federal Financial Institutions Examination Council (FFIEC) released data collected in 2011 under the Home Mortgage Disclosure Act (HMDA). The data include information on loan amount, loan type and purpose, property type and location, pricing, and applicant characteristics. The FFIEC release notes that the 2011 data reflect that (i) the FHA’s share of first-lien loans declined in 2011, but there remains a heavy reliance on the FHA program, (ii) only a small minority of first lien loans had APRs above the loan price reporting thresholds, and (iii) for conventional home-purchase loans, black and Hispanic white applicants experienced higher denial rates than non-Hispanic white applicants, similar to in prior years. While examiners consider HMDA data when assessing lender compliance with fair lending laws, the FFIEC cautions that such data do not include many potential determinants of creditworthiness and loan pricing, such as the borrower's credit history, debt-to-income ratio, and the loan-to-value ratio.

    FFIEC FHA HMDA

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