What Your Declines and Withdrawals Say About You
The regular review of the declines and withdrawals is a common practice at financial institutions. In fact a secondary review of decline notices and withdrawals is a standard part of a strong compliance management program. The typical review includes making sure that notices are given on a timely basis, to the appropriate parties and that the notices include the proper reasons for the declination.
We believe that with a little imagination and innovation, the information from reviewing declines and withdrawals can actually unlock a treasure trove of information about your financial institution and how it is relating to the community that it serves. In fact, your declines and withdrawals say just as much about your lending program as does the performance of the portfolio.
Basic Requirements of all Banks
The Community Reinvestment Act, The Equal Credit Opportunity Act, Fair Lending laws, the Home Mortgage Disclosure Act, and the Unfair Deceptive Abusive Acts or Practices Act all come together in a pantheon of laws aimed at shaping the way banks relate to the communities they serve. On separate occasions, we have discussed the origin of a number of these laws. We have always maintained that all of these laws were enacted as a result of bad behavior by certain institutions. And while there is plenty of disagreement about the overall efficiency of these laws, they are in fact here to stay.
There are several common themes from each of these regulations;
- Customers are to be treated fairly at all points of contact with the bank
- Loan applicants are to be judged on a basis that is objective
- Customers are to be kept informed of the basis for credit decisions
- Banks products should reflect the needs of the communities in which they are located
- The experience of customers who apply for mortgage products must be transparent
- All members of the community should be encouraged to become customers
Trying to meet all of these goals while still running a profitable operation can be a daunting task indeed. However, for institutions that are proactive and that have a strong commitment to compliance, meeting the goals of these regulations is a part of the overall strategic plan. Further, we believe that there are steps that banks can take to enhance the overall monitoring of the progress towards meeting these goals. The declines and withdrawals are a prime example.
Granted that some of the information that is required for banks to collect by HMDA is otherwise prohibited. For example, you cannot ask an applicant for a small business loan his race or ethnicity. That is unless, you are conducting a self-assessment of your overall compliance. To be precise Regulation B says at 202.5 (b) (1)
Self-test. A creditor may inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction for the purpose of conducting a self-test that meets the requirements of §202.15. A creditor that makes such an inquiry shall disclose orally or in writing, at the time the information is requested, that:
- The applicant will not be required to provide the information;
- The creditor is requesting the information to monitor its compliance with the federal Equal Credit Opportunity Act;
- Federal law prohibits the creditor from discriminating on the basis of this information, or on the basis of an applicant’s decision not to furnish the information; and
- If applicable, certain information will be collected based on visual observation or surname if not provided by the applicant or other person
In case you are wondering, section 202.15 is designed to encourage self-testing and it states, that the results of self-testing are privileged. The basic requirement here is that when you do find problems they must be appropriately address. You should also know that the fact that you did a self-test is NOT privileged. Therefore, if you perform a self-test and do not want to share the results with the regulator, that is your right. However, it is also a red flag to the regulator.
We believe that this provision of the regulation coupled with the fact that you already have a structure in place to collect the necessary information presents an outstanding opportunity.
Currently banks that are HMDA reporters are required to keep information on mortgage borrowers that withdraw their applicants before the process is completed. In addition information is required to be kept for loans that were approved and offered to the applicant, but rejected. This information can be used for a number of purposes. For example, a high level of withdrawals can be an indication that the loan process is taking too long to reach a decision. High withdrawals rates could also indicate that the pricing at your bank is not competitive.
We suggest that with a little extra analysis, this same information could tell you about the experience of minorities and women. Are women withdrawing at a higher rate than men? The same question could be asked about minority applicants. You could determine if applicants from low to moderate income tracts have the same experience as those form medium income and high income tracts. It is important to point at that the lack of minority or women applicants also tells a story!
Both HMDA and the ECOA require lenders to keep information about declines. However, only HMDA requires that information about the borrower’s race, ethnicity and gender should be kept. This information is generally used for a few purposes such as determining whether applications are being notified in a timely manner as required by the regulations. In addition, the decline files are generally used for the purpose of determining that the proper reasons for the declination have been given to the customer.
We note that with a minimal adjustment to the information that is collected, you could glean valuable data about the experiences of women and minorities. In addition, you could get important information about the experiences of people within low to moderate income tracts. This information would also help the bank to determine whether certain loan parameters are disproportionately impacting a certain segment of the community.
Using information from declines and withdrawals, your bank can also get a much better idea of where in the assessment area, your customers are coming from. If certain areas are being missed, the conversation about why and what can be done can begin.
Of course we are not suggesting that by doing an empirical comparison between the withdrawals and denials of women versus men or minorities versus nonminority will tell a complete story. It will help you to start asking the right questions and in so doing, get you to the point of better compliance. By addressing the questions raised by this analysis you direct resources to the highest areas of risk in compliance while improving your overall standing in your community. This information could lead to surveys questionnaires, focus groups or whatever innovations are appropriate.