Wiz Expert Blog

By Edward Kramer, Executive VP, Regulatory Programs

The Department of Justice has placed renewed emphasis on fair lending enforcement. In addition to the two recent DOJ cases involving alleged fair lending violations in the areas of mortgage and auto lending, recent activity of the DOJ is sending a crystal clear message on the direction of their fair lending enforcement activity.  Areas to watch include:

• Open investigations: There are 38 open DOJ investigations into accusations of lending discrimination.
• Loan modifications: The DOJ requested Treasury department data on loan modifications which they intend to review for signs of any disparate impact on minorities.
• New DOJ Unit: The DOJ recently created a new unit to focus on unfair lending practices – and is hiring at least four lawyers and an economist for the new unit, while about half a dozen current staff members will transfer into it.

What does this mean for your fair lending risk containment and compliance strategy?  Join us on Tuesday, March 16 for a free webcast, Recent DOJ Settlements Signal Tougher Fair Lending Enforcement, click here to register. We’ll analyze those decisions for recommendations on possible preventative measure to take when analyzing fair lending data.

In the spirit of the holiday season, what if you thought of your HMDA data as the ultimate gift? In a way, your HMDA data is a gift that keeps on giving. Every year your HMDA data provides valuable information about your institution’s lending practices. Your gift list includes regulators, the Board, your community, and your clients. This year make sure that everyone on your list is pleasantly surprised – and gets exactly what they hoped for.

First submit accurate and properly formatted data – and tie it with a bow! Then put some serious thought into conducting a review of your policies, procedures, lending activity and data to let your customers know how much they mean to you. And for those tough-to-please people on your list – conduct a HMDA data file review. You can take comfort knowing that your gift will be well-received by your regulator and very much appreciated by your Board.

We can help you tackle your gift list this year. With our broad experience and deep expertise we can provide the consulting services and technology solutions to help you from HMDA submission season to preparing and analyzing accurate data for an exam. Whether you are looking for a technology solution to format the data or don’t have the internal resources to do the work, below are some available solutions to help make your HMDA management responsibilities a little easier. For more information call Jennifer at 781-663-5378 or visit www.pciwiz.com.

Concerned about your HMDA compliance program?

Engage our consultants for a HMDA Compliance Program Review. Start the year with a professional review of your HMDA data management program to ward off the last minute submission crunch next year. Go into the New Year knowing that your institution has sound policies and procedures for collecting, editing and submitting HMDA data. Make sure operational procedures are in place to collect and when needed correct HMDA data. Conduct transactional testing on a sample of loan files to test compliance with regulatory requirements, determine if they conform to institution policies, identify risk, and implement a remediation strategy, if needed.

Need a HMDA management technology solution?

Whether you just need a solution for HMDA data or your technology needs to extend to CRA and fair lending data controls, find a solution that fits your budget, loan volume level, and reporting requirements. Our solutions can be integrated with loan origination or secondary market systems to perform data cleansing and standardization, compliance-grade geocoding, demographic data retrieval, high cost loan assessment, and premium loan locator functions.

Low on resources and worried about the HMDA submission deadline?

If you lack the resources in house to prepare your 2009 HMDA data, consider outsourcing the process. The HMDA Submission Services Package is a cost-effective outsourcing service that makes CRA and HMDA submission as easy as possible. The service includes importing a HMDA and/or CRA year end file, geocoding it, checking for any quality, validity, and/or syntactical errors, and submitting it to the government electronically using their required format. As part of the service offering, we will inform you of any government edits that are contained within the data files, providing the opportunity to make corrections or verify the data is correct. In addition to having the data submitted free of errors, you’ll also receive reports summarizing the data in the submission file and the transmittal sheet. The file, after it has been verified as “validity and syntactical-error free,” is encrypted using the FFIEC’s encryption software and submitted electronically.

Worried about potential HMDA data issues?

Resolve potential data quality issues before submission or in preparation for an upcoming exam. The HMDA Data Scrub is a cost-effective outsourcing service for conducting manual file review and resolving potential data discrepancy issues. This offering is ideal for clients that lack the internal resources to manually review a large volume of loan files on a tight schedule. A team will check critical fields in the HMDA Loan Application Registry (LAR) electronic file against the corresponding fields in the paper loan files. They will return a report detailing all uncovered discrepancies. Importantly, this service can include a report on the client’s current process for collection and editing HMDA records, describing gaps in the process and making recommendations for mitigating data entry errors going forward. Furthermore, while the team is in the loan file validating HMDA data they can also collect or validate the basic fair lending fields or conduct an independent test of your HOEPA designation.

Need to Get Up to Speed Fast on HMDA Basics?

Register for our Back to Basics training webcast, HMDA Essentials: Purpose and Reporting Requirements, Thursday, January 7th, 1:30 – 3:00pm Central. Cost $249. Click here to register.

By Donald L. Morrow, Ph.D., Senior Consultant, Econometrician, Wolters Kluwer Financial Services|PCi

1. Loan modification is a complicated process, focus on what is important and find what is measurable.
2. “Where” can be as important as “whom.”
3. Remember to focus on differences in frequency between protected and non-protected classes of key variables such as modifications, re-defaults, and foreclosures.
4. Don’t forget to look at differences in the mean values pre-mod and post-mod such as payment and APR.
5. The borrower has a much more important role in the process, acting as a demander of loan modification services. Often their role in the process is un-measurable, but should not go un-documented.
6. Don’t forget to look at the process underlying your NPV calculations.
7. HAMP may go away, but how it looks at the loan modification process will remain.
8. Be pro-active. Approach your regulator with a plan on how to manage the fair lending risk.

By Edward Kramer, Executive VP, Regulatory Programs

As U.S. mortgage servicers ramp up their loan modification efforts to help slow the exploding number of home foreclosures, the primary focus on doing so is mitigating financial losses for both the financial institution and borrower. However, the Treasury Department recently issued guidelines reinforcing the importance of compliance with fair lending requirements when modifying loans within its Home Affordable Modification Program (HAMP). Regulators have put forth notice they’ll intensify their scrutiny of servicers’ fair lending compliance. Regulators are already in the process of perfecting a methodology for reviewing banks’ practices to ensure consumers are treated fairly and legally and that banks are in full compliance.

My prediction – loan modifications will be the next fair lending frontier.

Operationally, loan servicers need to process large spikes in loan servicing activity efficiently. At the same time, they need to meet all regulatory requirements related to refinancing, modifying and servicing loans in an increasingly-complex and rapidly-evolving compliance landscape. While modifying loans at risk of default as quickly as possible is paramount for servicers and their borrower, so is making sure everyone is treated fairly and equally in the process.

Regulators are now looking at the fair lending implications during these processes, so mortgage servicers and banks need to look first. Before your regulator arrives, look at your loan modification program and be able to answer these questions:

• What criteria are used to determine eligibility?
• How are you monitoring and testing to determine whether minorities and other protected classes are being offered the same programs under the same timing?
• What “types” of loan modifications are offered?
• What kinds of fair lending monitoring and testing are being done in servicing and loss mitigation?
• What is being done to mitigate the inherent compliance and fair lending risks associated with loan servicing?

My advice? Start testing, start measuring the impact, and start making adjustments to your programs to remedy any appearance of disparate treatment or disparate impact.

By Edward B. Kramer, Executive VP, Regulatory Programs

As we all know by now, the House Financial Services Committee voted 39 to 29 on Thursday to approve legislation to create a consumer financial protection agency, a key priority in the Obama administration’s regulatory reform plan.

The bill would remove from the federal banking and thrift agencies their ability to write new consumer protection laws and it will transfer oversight of several major statutes such as the Truth in Lending Act and the Home Mortgage Disclosure Act to the new agency.

The committee approved an amendment that would let prudential regulators keep primary supervision, examination and enforcement of community banks with $10 billion or less of assets. Such institutions, however, would still be subject to rules written by the CFPA, which would also be given backstop enforcement authority.

I believe the end result will be more consumer compliance regulation, not less.

Although community and small to mid-sized banks will be exempt from primary oversight by the CFPA, the impact that will have on the overall regulatory structure will be significant. Let me explain my thinking.

First, the CFPA will write the rules of the game. It will be given the ability to write new consumer protection laws and with oversight of several existing statutes such as the Truth in Lending Act and the Home Mortgage Disclosure Act, you can expect more, not less.

Although the proposed legislation would let prudential regulators keep primary supervision, examination and enforcement of the under $10 billion community banks, such institutions would still be subject to rules written by the consumer agency, which would have a single focus on consumer protection.

Most important, I believe, is that the CFPA will also be given backstop enforcement authority, making it necessary for the prudential regulators to do their job, and do it well. Or else!

by Edward B. Kramer, Executive VP, Regulatory Programs

At last week’s MBA Regulatory Compliance Conference, a prominent Washington attorney noted that there would be a major uptick in federal bank regulator enforcement, both as part of usual examination process and as special inquiries.  Jeff Naimon of BuckleySandler said there would be a strong focus on pricing discretion – allowing less leeway, requiring greater monitoring and controls, as well as statistical analysis down to MSA level and increased pressure to refer possible discrimination to the Department of Justice.

He further noted a resurgence of Department of Justice enforcement and said that Attorney General Holder has pledged to refocus the Civil Rights Division on fair housing and fair lending. Civil Rights Division staff are renewing efforts on cases tolled from last Administration and letters have been going out in new cases. Fifty civil rights attorneys are being added.

Naimon pointed to this statement from US Attorney General Eric Holder:

“Discrimination in lending …is destructive, morally repugnant, and against the law. Lending discrimination prevents those who are discriminated against from enjoying the benefits of access to credit, including reasonable mortgage payments, so they can stay in their homes …. We are using the full range of our enforcement authority to investigate and prosecute this type of unacceptable lending discrimination.” 

Naimon further pointed to the written response provided by Assistant Attorney General for Civil Rights Nominee Thomas E. Perez to an additional question from a Senator following his nomination hearing: 

• Question: You stated in your hearing that you planned to use Department of Justice resources to play a role in foreclosure prevention, as you have done in the State of Maryland. If someone acquired a mortgage that they could not afford and there is no evidence that they acquired the mortgage as a result of discrimination, do you believe that it is the role of the Civil Rights Division to prevent foreclosure?
• Answer: If confirmed, I would work to protect homeowners from foreclosure by enforcing the provisions of the Fair Housing Act and the Equal Credit Opportunity Act. I would make sure that the Division continues to work with its federal law enforcement partners both within DOJ and outside (e.g. the Federal Trade Commission and the Department of Housing and Urban Development). For example, if there is not sufficient evidence of discrimination, but it appears that a borrower may have been defrauded or that a lender/broker/servicer may have violated other federal statutes, the Division would refer homeowners to the other agencies with jurisdiction.

Note: Nominee for Assistant Attorney General for Civil Rights Tom Perez is the author of the notorious Montgomery County, Maryland “anti-discrimination” ordinance.

At the same time, an article last week in the Washington Post stated:

Fed Broadens Its Oversight To Include Subprime Lenders

The Federal Reserve announced Tuesday that it will extend its regulatory umbrella to cover a group of lenders that includes several major originators of subprime loans, policing whether they follow federal laws that protect consumers of mortgages, credit cards and other financial products.

Federal banking regulators already oversee companies that own banks, known as holding companies, along with the banks themselves. Under the new policy, the Fed will extend the same oversight to other businesses owned by those holding companies, such as units that make home-equity loans.

The policy places subprime lenders such as CitiFinancial, an arm of Citigroup, and Wells Fargo Financial, an arm of Wells Fargo, under Fed oversight for the first time. The same laws protect all borrowers, but until now, no federal agency watched to make sure non-bank subsidiaries followed the law.

The decision reflects a basic shift at the Fed, which is charged by Congress with protecting consumers from abuses during financial transactions. After leaving its power largely unused during the housing boom, the Fed has lately begun to assert itself, for example imposing new restrictions on mortgage and credit card lenders.

Fed officials say the change reflects a renewed conviction in the importance of protecting consumers, particularly after the collapse of the housing market showed that abusive lending can damage the broader economy. The policy announced Tuesday “responds to a need for more effective supervision and consumer protection,” the Fed said in a statement.

The Fed also will begin to investigate complaints from consumers about transactions involving non-bank subsidiaries.

Banking 101 dictates that dual control is the solution and safeguard against internal theft and fraud.  Over and over, we are seeing cases where fraud has been successfully committed over extended periods of time and into the millions of dollars, where the “collusion” of two employees has made it possible. That very thought is the bedrock that bankers use as the stop-gap to preventing it.  The story linked below is yet another case of controls being being circumvented and finding a way to outsmart a manual system. When the reward is in the millions of dollars, the motivation is there.

The first hurdle to getting your arms around the risk is take the “person” out of the equation and insert “position” instead. Then look at the position and see what the risks are, as well as how they are controlled and mitigated . Then ask “can those controls be circumvented and is this manual solution effective today?”  Take a hard look at what you are controlling with dual control as your solution.  In some instances, that solution will work fine – such as in the case of opening/closing procedures, vault access and other physical functions. It’s when you look at what can be done electronically and behind the scenes that the true risk will present itself.  Look and see how you are reviewing access to your systems, customer accounts, dormant accounts, statements and alike.  Automation exists today that can monitor that activity and show you what at what the staff is looking at, thereby illuminating where the real risk is.

As examples – being able to monitor that your employee is looking at account inquires at a rate of 50 to 1 to others in the department would be a red flag. Knowing that the same employee took screen shots of all those accounts and now the majority of them have had debits made to them would be incredibly powerful intelligence to use in an investigation and to alert you of previously undetected activity.

In the linked story below, a tenured managment person and another employee worked together for years to embezzle funds. Dual control didnt work.  Automation can help detect similar cases that are amongst us and provide an impressive ROI with just just the first stopped scheme.

http://www.sunherald.com/pageone/story/1525921.html?storylink=pd

by Edward B. Kramer, Executive VP, Regulatory Programs

There a significant consumer protection development that is impacting the mortgage banking subsidiaries of bank holding companies, according to an article in the July 21, 2009 edition of National Mortgage News.

The Federal Reserve Board is expanding its consumer protection role by performing targeted exams of mortgage banking subsidiaries of BHCs, according to Fed chairman Ben Bernanke. The Fed traditionally has taken a hands-off approach to the non-bank subsidiaries of BHCs, but last year it engaged in targeted exams with state banking regulators. “In looking at our responsibility to enforce consumer protection laws, we believe a somewhat more pro-active stance is justified,” Mr. Bernanke told a congressional panel Tuesday. He acknowledged that the Fed’s authority over the non-bank subsidiaries of BHCs is a “bit vague” and said it would be helpful if Congress clarified the Federal Reserve Board’s authority.

The Fed chief also made it clear that he does not like the Obama administration’s regulatory reform proposal to create a Consumer Financial Protection Agency, which would strip the Fed and the other federal banking regulators of their consumer protection role. He stressed that the Fed is committed to consumer protection and the board has done a “good job” in the past few years. “If you allow us to continue to work in this area we will be interested in doing so,” he told the House Financial Services Committee.

Freddie Mac has issued their guidance about purchasing higher priced mortgages starting October 1st. Their guidance may have answered our questions about how to originate 5 year balloons and ARMS. For it appears they will not purchase these loans. This new wrinkle makes it even more important to test your loans early and often. If the loan is not a higher priced mortgage it is still good to go but if it exceeds the thresholds it has even more restrictions now.

(Bulletin 2009-17; http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0917.pdf)

By Kevin Byrne, Senior Regulatory Consultant, Wolters Kluwer Financial Services

After reading the article below, you wonder how a person can successfully perpetrate new account fraud via identity theft at a financial institution (FI).  Simply put,  it shouldn’t happen.

ID theft is now “old news” and we all know how the thieves get the information and what information they need to get on a person to attempt to steal identity. With name, address, TIN, DOB and mother’s maiden name, ID thieves reacked havoc on unsuspecting consumers years ago.  Suprisingly, it’s still happening.

A robust CDD and EDD program that “authenticates” customers attempting to open accounts at an FI goes beyond the basic questions of name. address, TIN, etc and asks detailed previous history questions that only the true customer can know. After asking the series of questions, a scoring result is presented to the FI so that a logical and informed decision can be made surrounding the potential customer. The use of this type of automation can prove to be invaluable to the FI by preventing new account fraud, loan fraud, ID theft etc.  A solid ROI can be proven in minimal time by preventing just one bad customer from getting into the FI.  Making the arrest of the bad guy is one thing – but actually preventing the fraudster from vicitmizing your bank in the first place is another – and should be your ultimate goal.

Myrtle Beach man sentenced for bank fraud, identity theft

Myrtle Beach man was sentenced in federal court for bank fraud and aggravated identity theft, U.S. Attorney W. Walter Wilkins said today.

Abdurrahman Cetin, 43, was sentenced to seven years in prison, to be followed by five years on supervised release, Wilkins said. Cetin was also ordered to pay $40,246.53 in restitution.

Evidence presented at trial showed that Cetin collected the personal and financial information of customers at a Toyota dealer in Long Island, NY, while working there as a salesman in 1999, Wilkins said.

Cetin saved the information and when he moved to Myrtle Beach, he used the information to open five bank accounts and obtained lines of credit at two Myrtle Beach banks, Wilkins said. When opening the accounts, Cetin gave other people’s names, dates of birth, and social security numbers.

He then withdrew money on the lines of credit he had established, Wilkins said.

Cetin was arrested at one of the banks and a search of his residence turned up six driver’s licenses with Cetin’s picture on them but in other people’s names, and 37 credit cards which had been issued matching the names on the counterfeit driver’s licenses, Wilkins said.

Other individuals’ credit reports and a computer used by Cetin to order counterfeit driver’s licenses were also found, Wilkins said.