We analyze Fair Lending risk and improve Fair Lending compliance programs

Our Fair Lending Consulting Services are based on experience and demonstrated expertise. We deliver these services in a customized way to meet your needs.

Experienced Professionals  |  Responsive Partners  |  Customized Services

Strong Fair Lending compliance is essential for every lender. The penalties for compliance failures range from time-consuming changes in policies, procedures, and business practices; substantial remedial payments; unwanted visibility and a tarnished reputation. Although maintaining a strong Fair Lending compliance program can be a challenge, doing so pays many dividends.

ADI will help you realize these dividends in every facet of Fair Lending compliance. ADI consultants have been working with clients on Fair Lending compliance issues for more than 20 years. We use this deep experience to ensure that you have a robust compliance program and that technical solutions fit well with your strategic objectives, business model, and culture. Our technical solutions include comprehensive Fair Lending risk assessments; sophisticated data analysis; geographic analysis, and virtually every other capability lenders need to improve their Fair Lending compliance position.

Fair Lending Compliance Programs

Strong Fair Lending compliance starts with an effective compliance management program. ADI has developed or evaluated compliance programs for many lenders.  We learn about each client’s business model, existing compliance program, and compliance experience. We provide independent insight into the strengths and weaknesses of the existing compliance program and then create a plan for enhancing it.

Compliance program weaknesses commonly lie in the following areas:

  • Compliance governance – the role of senior management and board members
  • Management of issues that warrant attention
  • Policies, procedures, and practices
  • Analysis and monitoring expertise
  • Integration with HMDA and other laws
  • Training curriculum and administration
  • Preparation for examinations

We recommend a plan for strengthening each weakness while embracing existing processes.  We build consensus and help implement the plan.

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Fair Lending Data Analysis

ADI delivers deep knowledge and extensive experience in data analysis for Fair Lending compliance. We apply this expertise to analyses of underwriting, pricing, pricing exceptions, and other areas of Fair Lending compliance. The objective is to determine whether adverse outcomes are associated with the customer’s membership in a prohibited basis group (or protected class).  We make this determination using econometric analysis or regression analysis – whichever approach best suits the client’s circumstances.

Econometric Analysis

Econometric analysis is a refined approach to regression analysis. It is disciplined thinking about how the economy and the decisions of lenders and their key employees influence underwriting and pricing decisions. Econometric analysis relies on the scientific method – the formulation, testing, and modification of hypotheses – applied to each client’s Fair Lending data. This approach brings within sight an expanded set of economic variables that our expertise enables us to use to improve our models.

ADI uses econometric analysis techniques to estimate Fair Lending risk for underwriting, pricing (APR, note rate, and fees), and pricing exceptions, among other objectives. This expertise has been particularly valuable to large-volume clients with complex business models and to clients of any size that face enforcement actions. In these situations, Federal and state government officials have teams of economists to contest client methods to measure and explain indicated differences in underwriting, pricing, distribution, and other areas of risk. ADI’s robust econometric analyses help level the playing field.

Regression Analysis

ADI may recommend more direct regression analysis where we do not deliberate on potential economic perspectives that might be incorporated in Fair Lending underwriting or pricing analyses. This is the case for some clients with relatively simple business models that are supported by a strong Fair Lending Compliance Program, consistently high data quality, or past analyses showing limited risk.

Model Validation

If we are not conducting the principal Fair Lending underwriting or pricing analyses for a client, at that client’s request, ADI will evaluate its current models and the processes and decisions that produced them. This kind of independent review strengthens the client’s confidence in its existing process or informs the client about ways to improve its Fair Lending analysis programs.

In addition, a third-party review can be helpful in the context of enforcement actions or other proceedings. In these cases, our evaluation can be used to find previously unidentified analytic strategies, approaches, or techniques that can help achieve a fair outcome.

Comparative File Reviews

Comparative File Reviews are a time-honored Fair Lending compliance methodology that ADI has employed since 2002. ADI conducts or helps clients conduct comparative file reviews (CFRs) on an outsource basis for some clients and in a collaborative process with others. For still other clients, we identify comparator files or advise clients who do their own CFRs. We also provide comprehensive training to clients who have purchased Comply™ Fair Lending for use in their own CFRs.

Fair Lending Self-Testing

ADI also provides Fair Lending self-testing services to consumer and mortgage lenders. Self-testing results are protected by a legal privilege under Regulation B, as long as the testing is conducted according to certain conditions.

The most popular forms of self-testing for Fair Lending compliance are mystery shopping, using matched pairs of shoppers, and surveys of customers:

  • Mystery shops can be used to test applications taken in face-to-face meetings, in telephone calls, or via the Internet and email with a loan officer.
  • Customer surveys can involve a sample of customers who are all contacted over a two- to four-day period or as call-backs stretched over a period of weeks. The chosen approach is tailored to fit the lender’s situation.

ADI has been implementing Fair Lending self-tests since 1993. These programs for Fair Lending address mortgage, auto lending, and other types of consumer lending.

Fair Servicing

In recent years, Fair Lending issues related to loan servicing have been most pronounced where borrowers have fallen behind in their mortgage payments. The lender’s options range from load modification to actions that could cause the borrower to lose the home. ADI helps evaluate whether these outcomes occur without regard to the borrower’s ethnicity, race, or other possible protected class status. Where servicing portfolios are relatively small, loan servicing issues can be addressed with Comparative File Reviews. For large portfolios, the best approach is regression analysis.

Fair Lending Risk Assessments

ADI conducts customized Fair Lending risk assessments for its clients. The objectives of these risk assessments are to identify the scope and depth of inherent risk , evaluate the controls or risk management strategies that have been adopted, and to identify the remaining areas of risk.

We conduct Fair Lending risk assessments in two stages. First, we gain an understanding of our client’s business model.  Second, we identify the full range of existing controls, and we evaluate each control for its adequacy and effectiveness in addressing Fair Lending risk. Because Fair Lending risk can be dependent on the strength of HMDA compliance and other closely related laws and regulations, we review them as well.  The result is a comprehensive review of our client’s Fair Lending risk position. We deliver a report that identifies areas where improvement is needed and we recommend a plan for achieving that improvement. We also help our client implement these recommendations.

Fair Lending Geographic Analysis

In recent years, the geographic distribution of lending activity – taking applications, making loans, and servicing loans – has returned as an active dimension of Fair Lending compliance. For example, enforcement officials in New York have raised concern about redlining by specific banks, and non-depository mortgage lenders have been asked about apparent gaps in their lending activity in some areas that have a majority-minority population.

ADI uses its proprietary resource, ADI Data Connect℠, to compile all relevant data on the geographic distribution of our client’s lending activity. We compare our client’s lending to other lenders’ activity and marshal relevant demographic and socioeconomic datato provide context for our client’s performance. We also use statistical analysis to identify any high-risk geographies or help explain why apparent areas of risk, in fact, are not areas of risk. Finally, our sophisticated mapping capabilities allow us to present our conclusions in clear pictures of where opportunities to lend are, as well as where they are not.