CCE-FL O Comptroller of the Currency Administrator of National Banks Fair Lending Comptroller’s Handbook January 2010 CCE Consumer Compliance Examination Fair Lending Table of Contents Introduction 1 GENERAL GUIDELINES 1 OVERVIEW OF FAIR LENDING LAWS AND REGULATIONS 3 TYPES OF LENDING DISCRIMINATION 6 Disparate Treatment 6 Disparate Impact 8 REFERRAL TO THE DOJ OR HUD 9 Examination Procedures for Setting the Examination Scope 10 BACKGROUND 10 OBJECTIVE: GAIN AN UNDERSTANDING OF CREDIT OPERATIONS 14 OBJECTIVE: CONSIDER THE EFFECT OF LOW-VOLUME OR HIGH-VOLUME FOCAL POINTS 17 OBJECTIVE: EVALUATE THE POTENTIAL FOR DISCRIMINATORY CONDUCT 20 OBJECTIVE: DETERMINE THE RELIABILITY OF THE BANK’S COMPLIANCE MANAGEMENT PROCESS AND USE THE FINDINGS TO ADJUST THE EXAMINATION SCOPE. 35 OBJECTIVE: COMPLETE THE EXAMINATION SCOPING PROCESS 36 Examination Procedures for Assessing Fair Lending Performance 37 OBJECTIVE: VERIFY ACCURACY OF DATA 37 OBJECTIVE: DOCUMENT REGULATION B COMPLIANCE CHECKLISTS 37 OBJECTIVE: CONDUCT AN UNDERWRITER INTERVIEW 38 OBJECTIVE: DOCUMENT OVERT EVIDENCE OF DISPARATE TREATMENT 39 OBJECTIVE: CONDUCT TRANSACTIONAL UNDERWRITING ANALYSIS – RESIDENTIAL AND CONSUMER LOANS 40 OBJECTIVE: ANALYZE POTENTIAL DISPARITIES IN PRICING AND OTHER TERMS AND CONDITIONS 46 OBJECTIVE: EVALUATE POTENTIAL FOR DISCRIMINATORY STEERING 48 OBJECTIVE: CONDUCT TRANSACTIONAL UNDERWRITING ANALYSIS — COMMERCIAL LOANS 53 OBJECTIVE: DETERMINE POTENTIAL FOR DISCRIMINATORY “REDLINING” 56 OBJECTIVE: DETERMINE POTENTIAL FOR DISCRIMINATORY MARKETING PRACTICES 67 OBJECTIVE: CONSIDER THE EFFECT OF CREDIT SCORING 69 OBJECTIVE: CONSIDER DISPARATE IMPACT ISSUES 69 Concluding the Examination 70 Comptroller’s Handbook for Compliance i Fair Lending Appendixes Appendix A: Compliance Management Analysis Checklist 73 Appendix B: Considering Automated Underwriting and Credit Scoring Risk Factors 81 Appendix C: Evaluating Bank Responses to Evidence of Disparate Treatment 90 Appendix D: Fair Lending Sample Size Tables 100 Appendix E: Identifying Marginal Transactions 103 Appendix F: Potential Scoping Information 105 Appendix G: Other Types of Discrimination Analyses 110 Appendix H: Using Self-Tests and Self-Evaluations to Streamline the Examination 116 Appendix I: Sample Fair Lending Section of Request Letter 121 Appendix J: Underwriter Interview Guide 123 Appendix K: Other Illegal Limitations on Credit Checklist 135 Appendix L: Technical Compliance Checklist 139 Appendix M: Alternative Fair Lending Analyses 148 Appendix N: Policy Statement on Enforcement of the Equal Credit Opportunity and Fair Housing Acts 153 Appendix O: Policy Statement on Discrimination in Lending (April 15, 1994) 155 References 178 Fair Lending ii Comptroller’s Handbook for Compliance Introduction Examiners use these procedures to evaluate a national bank’s compliance with the Fair Housing Act (FH Act), Equal Credit Opportunity Act (ECOA), and the Federal Reserve Board’s Regulation B. This booklet contains the Federal Financial Institutions Examination Council’s (FFIEC) “Interagency Fair Lending Examination Procedures,” and appropriate OCC supplemental material. General Guidelines These procedures are intended to provide a flexible framework to be used in fair lending examinations conducted by the FFIEC agencies. They are also intended to guide examiner judgment, not to supplant it. The procedures may be augmented by each agency as necessary to ensure effective implementation. For example, the OCC uses statistical modeling and regression analysis in selected examinations to assist in determining whether race, national origin, or sex was a factor in credit decisions. The OCC uses a risk-based approach to identify national banks and mortgage subsidiaries1 for comprehensive fair lending examinations. During each supervisory cycle, examiners perform a fair lending risk assessment in each national bank. Based on the risk assessment, examiners may initiate full scope fair lending examinations or other appropriate supervisory activities to ensure compliance with fair lending laws and regulations. To complement the supervisory office (SO) risk assessment process, the OCC also selects banks and mortgage subsidiaries for comprehensive fair lending examinations using a risk-based and random sample screening process that supplements the on-going supervisory office efforts. First, the OCC uses the Home Mortgage Disclosure Act (HMDA) data to select banks according to criteria related to the risk of fair lending violations. The examination scoping procedures typically are not applicable to such risk-based examinations since the screening process identifies a loan product(s) and a prohibited basis for review. Second, the OCC randomly selects a sample of banks and mortgage subsidiaries to receive comprehensive fair lending examinations. For 1 Throughout this booklet, bank or banks will include subsidiaries. Comptroller’s Handbook for Compliance 1 Fair Lending examinations of randomly selected banks, examiners use the examination scoping procedures in this booklet. If the supervisory office or OCC policy has designated certain banks, products, market areas, etc., as priorities to examine, OCC examiners make scoping decisions accordingly. Absent such guidance, OCC examiners who use the scoping procedures should treat them as a menu from which sections should be selected, not as a recipe to be followed entirely in every examination. Specific to the OCC, this booklet: • Directs examiners to take different approaches depending on whether a bank is selected based on risk, via the screening process, or randomly. • Contains threshold procedures for determining whether the OCC should use statistical modeling for the comparative analysis. • Contains procedures and supporting materials for determining whether banks are in compliance with: − Requirements in Regulation B (12 CFR 202) Regarding Other Illegal Limitations on Access to Credit. A number of provisions in Regulation B are intended to facilitate access to credit by providing consumers with certain rights (for example, the right to open a credit account in a birth given name) or by imposing on banks certain obligations (for example, not to alter terms of a credit account adversely because the account holder retires). Noncompliance can harm consumers. Some of Regulation B’s consumer rights are not stated explicitly in terms of a prohibited basis (for example, discounting or excluding “protected income,” in violation of 12 CFR 202.6(b)(5)).The OCC additionally evaluates the possible role of a prohibited basis in such violations. (In this booklet, only violations involving a prohibited basis are referred to as “discrimination.”) There is a checklist in appendix K of this booklet for reviewing compliance with these provisions of Regulation B and guidance in the examination procedures for using the checklist. − Technical Requirements in Regulation B (12 CFR 202). Regulation B requires banks to use certain practices that do not directly relate to evaluating the applicant’s creditworthiness (for example, retaining records of credit transactions). These requirements are important, in part, because they facilitate creation of records that support comparative file review and help consumers obtain their rights. Examiners evaluate compliance with these provisions when setting the Fair Lending 2 Comptroller’s Handbook for Compliance overall supervisory strategy for the bank. There is a checklist in appendix L of this booklet to assist in these reviews and guidance in the examination procedures for using the checklist. The procedures emphasize racial and national origin discrimination in residential transactions, but the key principles are applicable to other prohibited bases and to nonresidential transactions. These procedures focus on analyzing bank compliance with the broad, anti-discriminatory requirements of the ECOA and the FH Act. If there are pending administrative proceedings or government enforcement litigation involving the bank’s fair lending compliance, generally a fair lending examination should not begin. The OCC may conclude that a referral to the U.S. Department of Justice (DOJ), a referral to the U.S. Department of Housing and Urban Development (HUD), or an OCC enforcement action is appropriate to address possible illegal disparate treatment or some other fair lending violation, even if the OCC fails to follow any of this booklet’s procedures or practices. Neither is such a failure sufficient by itself to rebut information suggesting that a violation occurred. The OCC will base its conclusions on the reliability and totality of the information and circumstances. Overview of Fair Lending Laws and Regulations The ECOA prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, including those to small businesses, corporations, partnerships, and trusts. The ECOA prohibits discrimination based on: • Race or color. • Religion. • National origin. • Sex. • Marital status. • Age (provided the applicant has the capacity to contract). Although ECOA prohibits discrimination on the basis of age in the extension of credit, it permits banks to favor “elderly” applicants. Regulation B defines “elderly” as 62 years old or older. • The applicant’s receipt of income derived from any public assistance Comptroller’s Handbook for Compliance 3 Fair Lending program. • The applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act. The Federal Reserve Board’s Regulation B, found at 12 CFR 202, implements