Alert September 16, 2008

Comptroller Dugan Discusses OCC’s Expectations with Respect to Fair Lending Compliance

Comptroller of the Currency, John C. Dugan, made a presentation at the 2008 OCC Fair Lending Conference in New Orleans concerning banks’ fair lending requirements.  Comptroller Dugan stressed that the US is undergoing a period of unusual turmoil in the financial markets.  In addition to and in part because of this disruption in the financial markets, the mix of products offered to consumers and the way business is conducted are undergoing drastic changes.  Comptroller Dugan warned that despite the challenges and the distractions that are currently presented to bankers regulators expect banks to continue to focus on still important priorities, such as fair access to credit.

The crux of Comptroller Dugan’s speech was the importance of statistical analysis and modeling in the regulation of fair lending policies by the OCC.  Particularly, in the case of large institutions, he said, such statistical analysis will play a greater, more crucial role in the OCC’s regulation in the years ahead.  The Comptroller touched upon the massive number of loan applications handled by the largest institutions, and noted that in order to be efficient both bankers and regulators need to use automated tools to examine fair lending procedures.

Comptroller Dugan stated that because of the very high number of loans that are originated, the OCC cannot review each loan application one by one, but rather needs to use a more systematic and efficient methodology, such as statistical analysis.  Comptroller Dugan noted that the empirical analysis that is being implemented by the OCC needs to be more than a simple comparison of denial rates and average spreads across groups.  He stated that accurate assessments require the application of more sophisticated methods of statistical analysis; including regression analysis.  Comptroller Duggan said that all variables that are valid and which reflect legitimate, non-discriminatory underwriting polices should be included in the OCC’s statistical approach, but he also noted that the picking of factors is still an art and not an exact science.  He stressed that there needs to be prudent judgment in the modeling and the analysis, as well as valid interpretations of the results.  The statistical analyses that are employed by the OCC vary from bank to bank based on the size of the lender, its complexity and its business profile.  He noted that in the case of smaller banks, simpler techniques are used and in some cases modeling is not used at all.  The OCC is considering a potential change to the fair lending screening process used for the largest national banks.  In the coming year, the OCC will use a pilot program, with large banks, that will test, among other things, loan-to value ratios, credit scores, and debt service ratios. 

In concluding, Comptroller Dugan stated that “there is an aspect of [fair lending] that goes beyond doing analysis and following the rules.  Institutions that are top performers in the area of fair lending do so because fair treatment of customers is a fundamental to how they do business.”  While the OCC will begin to implement more statistical analysis into their supervisions of fair lending, it is clear that the focus remains on ensuring that all consumers have fair access to credit.