November 2016 - End of the Road?

TheMReport — News and strategies for the evolving mortgage marketplace.

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18 | TH E M R EP O RT FEATURE F air lending compliance is poised for the kind of digital transforma- tion that is redefining so much of banking already, from global payment sys- tems to mobile customer transac- tions. On the regulatory side, fair lending enforcement is expanding in complexity and gaining in momentum. On the compliance side, automated monitoring, busi- ness analytics, and Software as a Service (SaaS) delivery models have been making rapid advances that can facilitate the identification of lending patterns and potential fair lending issues. As the Consumer Financial Protection Bureau (CFPB) cel- ebrated its fifth birthday this summer, Director Richard Cordray laid out a fair lending roadmap and examples of multimillion- dollar actions in a consequen- tial speech before the National Association for the Advancement of Colored People (NAACP). He listed a growing range of home, auto, and other consumer lend- ing sectors that are now under more intense scrutiny than ever from the CFPB, the Department of Justice (DOJ), and other federal agencies. The categories of lend- ing activities these regulators have prioritized for examination have also proliferated, from origination to servicing to marketing. What's more, it is evident that the CFPB, and the prudential regulators (Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, and National Credit Union Administration) have been moving down the list from large institutions to mid-sized and smaller lenders, and from banks to all types of financial services companies. While the regulatory targets may now be marked, it is less clear how well the industry is prepared to handle the mount- ing complexities of fair lending compliance, particularly since the rules themselves continue to shift. A pointed example of this regulatory challenge is the array of new requirements for report- ing mortgage application and loan information scheduled to go into effect in January 2018 under the Home Mortgage Disclosure Act (HMDA). To keep pace with all of these changes, the industry is trend- ing toward more sophisticated, statistics-based quantitative analyt- ics—like regression modeling—that produce faster, more reliable results to support lending strate- gies and prepare for the next fair lending examination. For many lenders with narrow operating budgets, the typical options for achieving this level of monitoring and analysis have been off-putting: Either hire a third-party with fair lending and statistics expertise, or build out the in-house program with experienced statisticians and subject-matter-experts. Both options are often unattainable for institutions with limited compliance budgets and skilled resources. Meanwhile, compliance teams are already stretched, and strategies are therefore applied in a reactive mode. How can these lenders rise to the challenge and complexities of today's fair lending and compli - ance requirements? How can they ensure they can meet growing reporting requirements, align with current regulatory methodolo- gies, and be prepared to handle multiple exams from multiple regulators? The good news is that cost-effective, modern technology is available and has been tailored to help automate financial services companies' compliance with fair lending laws and regulations. A Multi-faceted Function I n the last few years the federal government has set in motion a complex convergence of fair lending changes across the financial services industry. Current impacts on mortgage lending include the following: • Where the focus in the past has been largely on originations, regulators have expanded their interest into lenders' marketing activities to potentially identify discriminatory patterns at the point of making credit available to consumers. This requires lenders to run multiple analyses on application and origination volume for an underwriting/ pricing review. • Another area of expansion is fair servicing. The CFPB issued a 900-page mortgage servicing final rule earlier this year and declared it a priority for 2017. Although the rule is operational in nature, increased attention to discriminatory issues in servicing, loss mitigation, and foreclosure processes is evident. • Regulators have automated and publicized consumer complaint filings, which can trigger ad - ditional regulatory investiga- tions and damage companies' reputations. • Fair lending risk has surged with the Supreme Court's 2015 ruling on disparate impact. Regardless of intent, the court said, a lender can be sued for disparate impact when applying a seemingly neutral policy or practice that is nevertheless seen to have adverse effects on a protected class. • "Redlining," which oc- curs when a lender avoids Walking a Tightrope With heightened scrutiny on a variety of fair lending rules and initiatives, lenders must tread carefully. Technology may give them the steady footing they need. By Dr. Anurag Agarwal and Brenda Baylor

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