The New Lending System - Putting common sense into compliance and risk assessment

In a piece for the American Banker today, entitled “GAO: Poor Data, Oversight Stymie Fair-Lending Laws ,” Stacy Kaper reports on the Government Accountability Office (GAO) report just released by House Financial Services Committee Chairman Barney Frank. The reports concludes that HMDA data alone are not sufficient to determine if lending discrimination is present – not a startling revelation to those of us who have been working in this area for many years!

I recall a presentation entitled “HMDA Data Analysis: Interpreting the Pictures Painted by Public Data” that Sunny Zhang and Fiona McNeill and I put together and presented at a major industry conference back in 2005. The talk centered on what conclusions could be drawn from the HMDA data alone and how it should be interpreted. While Sunny, Fiona and I recognized back then the incompleteness and limitations of HMDA data, we also promoted a universal performance indicator, which can be used to immediately convey the ‘exposure picture’.

Fair Lending Compliance: Intelligence and Implications for Credit Risk Management, Clark Abrahams and Mingyuan Zhang, Copyright © 2008, SAS Institute, Inc. Reprinted with permission of John Wiley & Sons, Inc.

This singular indicator decomposes into different perspectives on lending activities based upon the FFIEC peer HMDA detail data. Using this patent-pending methodology, fair lending analysis can readily be extended to include non-public data that spans borrower risk (i.e. credit scores, loan-to-value and debt-to-income ratios), channel, transaction, market, and collateral information, as is suggested in the GAO report released yesterday.

Quoting the American Banker article, “The GAO found that each federal regulator uses a different approach to analyze HMDA data to identify outliers and examination documentation varies.” Nothing like some good old fashioned inconsistency among our government agencies to add some additional challenges for the lenders! The report goes on to say that “the evidence suggests that lenders regulated by FDIC, the Federal Reserve, and OTS are more likely than lenders regulated by OCC and NCUA to be the subject of referrals to DOJ for being at potentially heightened risk of fair-lending violations.” That simply makes no sense.

These GAO findings raise serious questions about the effectiveness of regulatory oversight. SAS can help the regulators achieve greater consistency by providing analytical frameworks that foster systematic and consistent approaches for regulatory compliance testing and risk assessment. Frameworks portray “how it all hangs together” and they are sorely needed as Congress considers financial modernization and new regulations to better insure the safety and soundness of the financial system that forms the bedrock of our economy.