Industry Letters

Fair Lending Examinations

February 16, 2001

To: The Licensed Mortgage Banker Addressed

Re: Fair Lending Examinations S

As you know, a fair lending compliance review with Section 296-a of the Executive Law is part of the mortgage banker examination program. The purpose of this letter is to provide guidance with respect to the new examination process so that you may be able to comply promptly and fully with our information needs. With adequate preparation on the part of the licensee, the examination can proceed smoothly and expeditiously, with a minimum of disturbance to normal operations.

The fair lending review is generally a two-stage process. The first part is an off-site statistical analysis of loan data provided by the mortgage banker. The analysis looks for the presence of patterns of discrimination adversely affecting members of protected classes, particularly with respect to loan pricing and underwriting decisions. Next, an on-site examination is made to confirm the accuracy of the data supplied and to review those aspects of policies, procedures and operations having an important role in fair lending compliance. If the results produce significant fair lending concerns, it may be necessary to conduct a further, more intense review.

The on-site fair lending examination takes the same general form as the familiar compliance examination conducted of each mortgage banker periodically. The examiner presents the licensee with a detailed list of the materials and information to be made available for review. In addition, the examiner conducts a file review of a sample of loans chosen randomly. The on-site review normally takes 3-5 working days when all examination materials have been promptly provided. Following internal review of the field examiner’s findings, a report of our findings is sent to the licensee.

Statistical and regression analysis are regulatory techniques that have been utilized for a number of years by federal and state bank regulators in fair lending examinations of depository institutions. Typically, the licensee will be asked to provide loan-level HMDA data in electronic, regulatory (DAT) format1 for the last three years’ loan applications. Using special software, the Banking Department analyzes the data for evidence of discrimination in the credit denial process associated with the race, age or gender of the applicant or other impermissible factors. A further analysis is conducted of a subset of closed loan data for indications of pricing discrimination. Generally, the size of the additional review will encompass 200 to 300 accounts. Licensees who closed less than 300 loans must supply data for all closed loans. The credit pricing review involves 14 additional loan data elements not collected in the standard HMDA report:

  1. Note Rate
  2. APR
  3. LTV
  4. FICO Score
  5. Custom Credit Score (if the entity internally rates- for example, A, B, C, D)
  6. Back End Debt Ratio
  7. Loan Program (Fixed or Adjustable)
  8. Broker Fee Charged, in Dollars
  9. Broker Fee Charged, as a Percentage of the Loan Amount
  10. Prepaid Finance Charge, in Dollars
  11. Prepaid Finance Charge, as a Percentage of the Loan Amount
  12. Loan Term
  13. Applicant Age
  14. Co-applicant Age

Supplying the requested data is a relatively simple matter if the loan records are computerized. The Banking Department is able to convert most common types of electronic data to regulatory format. If you anticipate that your company will not be able to submit the data in electronic form, please immediately notify the undersigned in writing. I look forward to your cooperation in this matter.

Very truly yours,

Richard Ehli
Deputy Superintendent
Mortgage Banking Division

S This is first of a series of guidelines designed to address the most critical issues in the Department’s fair lending reviews. This letter addresses the data requirements necessary to conduct an effective and efficient evaluation of data reported under the Home Mortgage Disclosure Act. Subsequent guidelines will address such matters as pricing and terms and conditions, among other issues.

1 For further information about data format requirements, contact Serge Garanin, Research Specialist, at (212) 618-6444.