The Top 10 Worst Excuses for Not Analyzing HMDA Data for Fair Lending Compliance

In September, the regulators will release the public HMDA data. For many institutions, this will mean analyzing your HMDA data and comparing to peers and benchmarks to identify potential risks. While we're not naming any names, this time of year also means we hear a lot of excuses for why financial institutions aren't analyzing their HMDA data.

Here are the top 10 worst excuses for not analyzing HMDA data regularly - and why they're risky. Not only will you learn why data analysis is important, you'll learn some key data points to consider.

In about a month, the regulators will release the public Home Mortgage Disclosure Act data from 2016. Every September, this release of the prior year's HMDA data sparks renewed focus on Fair Lending compliance. 

As that September release of the public HMDA data approaches, we will be sharing unique perspectives on the importance of data analysis for Fair Lending compliance, and ways to approach it. But before we get to those topics, we're going to shift the focus a little bit and discuss some of the reasons you or your colleagues may not yet be analyzing your HMDA data for Fair Lending compliance.

Most compliance pros we speak to - from colleagues, friends, to current and future customers - are managing multiple areas of compliance risk. We understand that competing regulatory requirements can be difficult for compliance departments, but HMDA data analysis remains an area of focus for examiners.

Not analyzing HMDA data can result in inefficient, and possibly inadequate, Fair Lending risk management. It is an essential starting step for Fair Lending compliance success. Better yet? Fair Lending analysis can be simple.

In that spirit, here are 10 of the worst excuses for not analyzing HMDA data for Fair Lending compliance - and how to respond!

In no particular order, here are the 10 excuses:

1. We have strong policies, procedures & programs, so our risk exposure is under control.

Having strong Fair Lending policies, procedures and programs is a great start for managing compliance and controlling risk. However, these three alone are not enough to efficiently or effectively control Fair Lending risk. 

For one thing, the regulators are expecting you to analyze your data for potential disparities.  Even if you're doing everything else right, a weak or non-existent data analysis program will not be smiled upon. 

More importantly, how can you know if your Fair Lending policies, procedures and programs are actually working to control risk if you're not monitoring the key risk indicators? One of the only ways to truly monitor Fair Lending risk indicators, such as disparities, is by analyzing your loan data. Remember: disparities do not always mean discrimination is occuring, but only in-depth data analysis can accurately identify your risk. 

2. Our last exam went well, so we aren't going to worry about it this year.

A good exam last year is no guarantee for a positive exam experience in the future. As an institution's risk profile changes, the Fair Lending risk management process, including data analysis, needs to evolve as well. 

If your institution's services, hours of operations, employees, loan volume, market demographics or market areas have changed, so has your risk exposure. As a result, the factors that contributed to a positive exam experience last time have likely changed.

Data analysis will help you get a sense of any changes in your Fair Lending risk exposure, and how to reduce it.

It's wonderful that you had a positive exam experience recently. To ensure that your next one is just as good, or better, incorporate Fair Lending data analysis into your compliance management program.

3. With the potential of deregulation on the horizon, we're not focusing on compliance.

There are rumors that deregulation is on the horizon, and that may mean that your institution is waiting to see how that will play out to analyze your data. However, consumer compliance regulations have existed for decades.

Even if regulations such as Dodd-Frank were rolled back, the core of Fair Lending compliance would remain a priority for regulators. Many of the key Fair Lending and consumer protection laws, such as ECOA, the FHA and CRA have been around for decades. We don't know what the future of compliance will hold, but we do know that Fair Lending compliance will be important in the future, regardless of examiner or agency.

4. We don't have any real diversity in our market.

All communities have some diversity, because all communities likely include people of different genders.

Many factors beyond race or religion are considered prohibited bases.

For example, ECOA prohibits discrimination based on: race or color, religion, national origin, sex, marital status, age, receipt of income from any public assistance program, or the applicants exercise of rights under the Consumer Credit Protection Act. The

FHA prohibits discrimination based on: race or color, national origin, sex, familial status (i.e. children under 18 living with a parent or legal custodian, pregnant women, and people securing custody of children under 18), or physical handicap.

5. We would like to analyze our data for Fair Lending, but it seems too expensive for us.

Fair Lending data analysis can be expensive, but it doesn't have to be to. TRUPOINT Analytics, our compliance analysis software for Fair Lending, CRA and Redlining compliance, is designed to fit in any institution's budget.

TRUPOINT Analytics is one platform with multiple subscriptions. The best part? Each Analytics report comes we a guided, consultant-led review - at no extra charge. We'll tell you the results of the analysis and what that means. With the reports, you'll learn:

• Any potential lending disparities based on prohibited bases;
• How your loan pricing and terms will be viewed by examiners;
• Key compliance focal points and how to manage them, and so much more!

6. Our institution is better off not reviewing our data. If the regulators find an issue, we'll address it then.

In the past, there have been a few instances where an organization's knowledge of risk and lack of response was viewed negatively by the regulators. This usually occurs when regulators think that an institution doesn't prioritize compliance, and so isn't responding quickly enough to risks. 

If you do find risk and you work to manage it quickly, efficiently and proactively, it's highly unlikely that an examiner will view that harshly. In addition, regulators are expecting that you analyze your data for the purpose of proactively managing risk. If you're not analyzing your data, that will be seen as a lack of commitment to compliance.

Consider the alternative: without active data analysis and risk management, small risks can grow into larger ones, and result in even more regulatory scrutiny.

7. We have an exam coming up, so we just have too much going on right now.

An upcoming exam can add a lot of unwelcome stress, and even throw your compliance management into disarray. It's easy (and often necessary) to push certain compliance items to the back burner when an exam is imminent. 

However, there are a lot of unexpected benefits of analyzing your data as part of your Fair Lending compliance exam prep. For one, you will likely get a sense for what the regulators will see when they look at your data, helping reduce unwelcome surprises. 

Leaning on experts to help analyze and understand your data can provide actionable insights, and unique perspectives on how to comply and grow.

Finally, analyzing your data in advance of an exam with a trusted partner will help you understand the story your data tells, and defend your institution against examiners' questions. Say that an examiner notices a disparity and brings it to your attention. Luckily, you've already spent some time with the data and know that the disparity isn't statistically significant; in fact, you already know that it's driven by just one or two loans. You can share this information with the regulators, and explain the story your data tells.

TRUPOINT's team of compliance experts have helped our customers through hundreds of exams. In the process of analyzing your data, we will highlight disparities, explore what is driving them, and how to mitigate those risks.

If you have an exam coming up, and you haven't yet analyzed your data, now is the best time to start. Not only will analysis of Fair Lending data help empower your team to answer regulator questions and prepare for any scrutiny, but it will also help reveal insights that can improve sales and marketing efforts.

8. We've struggled with data analysis for years, and are just not seeing any concrete benefits.

Conducting Fair Lending data analysis on your own, without the aid of a statistical tool, can be one of the most complicated, time-consuming and stressful phases of Fair Lending compliance. You don't want to spend weeks or months implementing software, you aren't a statistician (probably), and pivot tables just won't cut it anymore.

That said, Fair Lending data analysis should be more than just a box you check. The right partner in Fair Lending compliance analysis can deliver real insights, and help you improve to comply and grow.

If you're not seeing concrete benefits of data analysis, the problem is more likely with your analysis software, tools and vendors than the analysis itself.

9. We're a small lender, so Fair Lending doesn't really apply to us.

In general, smaller lenders do tend to have less Fair Lending risk exposure. However, Fair Lending does apply to all lenders. It only takes one loan.

The amount of Fair Lending risk depends on lots of factors, including product complexity, market diversity, loan volume, and compliance history. While the level of intensity of a Fair Lending exam will differ depending on your institution's risk exposure, Fair Lending analysis is part of every compliance exam.

10. Fair Lending is mostly about underwriting and pricing risk, and we have softwares that manage those, so we don't need to analyze our data.

Fair Lending applies to every phase of the crediting process, from marketing all the way to servicing. Even if you have an automated underwriting or pricing software, other risks may exist.

In addition, some institutions that use software to reduce risk in certain areas of lending may still allow exceptions. It's a good idea to keep an eye on exceptions in pricing and underwriting, particularly in approvals and denials. Everyone involved in lending should be clear about when and where exceptions and discretion are allowed, in part because the regulators will likely focus on them, too. 

Pay attention to how exceptions are determined and processed, and view exceptions to determine if pattern exist that may attract regulatory attention. In addition, be aware of “high side” denials and “low side” approvals.

TRUPOINT Viewpoint: Fair Lending data analysis is tough for many compliance departments, and it's also one of the areas where our TRUPOINT Analytics compliance analytics system differentiates itself.

As a TRUPOINT Analytics customer, you'll get access to interactive dashboards, tables, charts, maps, and more. As mentioned above, you'll also recieve a guided review with your dedicated Fair Lending analyst to analyze your data with you and explain your risks. Your analyst will also help show you the ones that are statistically significant, and may draw the attention of your examiners. In that review, your analyst will provide valuable insights that you can leverage.

If you have deeper questions, our team is here to help. We really are a partner to our clients. In the meantime, check out a quick, 2-minute video demo of TRUPOINT Analytics to learn some of the benefits you and your institution will experience: