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News Release 2008-103
September 10, 2008
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NEW ORLEANS—Comptroller of the Currency John C. Dugan said today that the present turmoil in credit markets should not distract bankers and lenders from the important priority of fair lending.
"We simply cannot allow that to happen," Mr. Dugan said in a speech to an OCC sponsored conference of bankers and regulators. He emphasized that all qualified borrowers should have access to financial services and credit, free of unlawful discrimination.
Comptroller Dugan encouraged lenders to keep an appropriate focus on fair lending. He pointed out that "at the OCC we take our fair-lending oversight responsibility very seriously."
The OCC Fair Lending Conference highlighted the role of statistical analysis and modeling in fair lending. As residential mortgage lending has grown to a large scale, sophisticated analysis is increasingly essential for many firms. Comptroller Dugan noted that nobody can realistically expect to review millions of loan applications one file at a time for compliance with fair lending laws and regulations. Bankers and regulators need tools for large-scale automated file review, to help target resources at areas of the highest risk and with the greatest effect, he said.
Comptroller Dugan reminded the audience that raw disparities in the numbers are not necessarily proof of discrimination. He said that data reported by banks under the Home Mortgage Disclosure Act (HMDA) "are a valuable starting point for this analysis, but … HMDA data alone are not enough, and can even be misleading unless interpreted carefully," and that "fairness and potential discrimination can't be assessed by comparing simple denial rates or average rate spreads across groups. A valid assessment requires the hard work of applying more sophisticated methods from probability and statistics, so that relevant factors are considered in a rigorous and systematic way," Mr. Dugan said.
The OCC is considering a potential change to the fair-lending screening process for the largest national banks, Mr. Dugan said. The OCC has found that additional factors that are not part of HMDA reporting, such as loan-to-value ratios, credit scores, or debt service ratios, are needed to do a more targeted analysis of each lender's underwriting and pricing decisions, and these factors are incorporated during later stages of the supervisory process. But with improvements in data capabilities at large banks, there may be a way to bring these factors into the process much earlier, he said.
"In the coming year, through a pilot at some of the largest national banks, we intend to test the feasibility and value of collecting that kind of information from lenders at the same time that they report as required under HMDA," Comptroller Dugan said. "Getting this information – call it ‘HMDA Plus' – early enough to use in screening could help us do an even better job of targeting our supervisory resources where they can bring the most benefit for fair lending."
Comptroller Dugan observed that New Orleans is an "especially good choice" for the Fair Lending Conference. He noted that the city of New Orleans is still recovering after the devastating Katrina hurricane of 2005. As the citizens of the city rebuild, an adequate supply of credit is essential to their efforts. Mr. Dugan has made four trips to the area since Katrina struck and has repeatedly emphasized the role that national banks and the OCC must play to support the vitality of the area.
Comptroller Dugan had several key points or "takeaways" for the bankers in the audience:
The first point was to not lose focus on fair lending during challenging times of credit market turmoil and fast-paced technological and business change.
Second, banks should integrate fair lending into new product design and modification decisions.
Third, each bank should conduct a thorough self-assessment of fair lending risk – "in my view, each lender should be doing such an assessment for itself, not waiting for us to do it."
Fourth, he urged bankers to "make fair lending a part of the culture of your institution. When fair treatment is integral to the way a business operates, rather than an afterthought or a ‘compliance exercise,' compliance risks – and the reputation risk and financial exposure that can so easily accompany them – fall dramatically. Perhaps more importantly, when fair lending is part of institutional culture, it won't get brushed aside when times get tough, or overlooked when innovative products come along."
Kevin M. Mukri (202) 874-5770