Compliance departments can usually be found buried underneath mountains of paperwork. Fortunately, the software to help them tunnel through is beginning in appear.
Despite widespread automation, following the dictates of the Community Reinvestment and Home Mortgage Disclosure Acts often requires such time-consuming hands-on tasks as physically cross-checking the addresses on loan applications against actual maps for each census tract. There are software programs that automate this geocoding process, but no program suits every bank.
One problem is that loan application and origination is still a paper-based process at many banks. In addition, the tortuous path that data must follow from application to compliance includes only a few automated steps. Even those functions that have been automated aren't easily integrated in many instances. That leads to the same information being typed and retyped, which is both time-consuming and likely to produce errors. That gets to the thorniest issues surrounding fair lending compliance.
The data that banks include in their HMDA and CRA reports are made public, and where they show weaknesses in lending volume or approval rates in low-income or minority neighborhoods, they set off alarms among housing advocates and the general-interest press.
"The banks in many cases say the data is inaccurate," says Lee Cross, a spokeswoman for the Office of the Comptroller of the Currency, "but it's data they themselves have submitted." She says that regulators have found getting accurate data to be a persistent problem.
None of this means that the compliance software landscape is barren; on a scale of 1 to 10, it's rated a 5 or 6 by one banker who has just completed a survey of the field. But more progress clearly needs to be made before compliance becomes less burdensome.
Even those automated systems that do exist too often permit electronic loan application forms to be processed without the inclusion of CRA- or HMDA-mandated data--an important control feature, according to Bob Barton, an organizational assessment manager at Pittsburgh-based Integra Financial Corp. He surveyed 20 other lending institutions as the first step in reengineering Integra's lending operations.
It's still an everyday occurrence for loan officers to leave out an applicant's race or the reason for rejection. That means someone from compliance has to call the branch that originated the loan and have the loan officer supply the missing information. This takes time, costs money and leads to mistakes. Worse yet, some of those mistakes wind up being filed with regulators.
A Fail-Safe Solution?
Old Second National Bank, located in the Chicago suburb of Aurora, IL, has found a solution to this particular problem. The bank's origination system, which uses the Mortgage Publisher program from FormAtion Technologies of Denver, requires loan officers to follow a series of pre-determined steps before sending an application on for credit review and underwriting, says Kathy Lorenzi, the manager of technical support for the $345-million-asset bank. If information is left out, the loan file can't be stored. That makes it almost axiomatic that a home loan is compliant with fair lending regulations. "It's not so simple that your loan officers don't have to know what they're doing," says Lorenzi, but it does help.
Mortgage Publisher costs $5,500 for a single-user version, and $12,500 for a network version.
The program will run on IBM-compatible computers with an 80386 Intel Corp. processor and 4M bytes of memory. It can run on Microsoft Corp.'s DOS, Windows NT and Windows 4.0 operating systems and IBM Corp.'s OS/2.
Integra, too, hopes to tackle some of its more pressing software problems as it automates the application phase for its consumer lending and mortgage business, says Barton. In the next few months, it intends to install the Credit Review consumer lending system from Credit Management Solutions Inc. (CMSI) of Rockville, MD, and the Control Z mortgage origination program from Lakewood Corp. of Greenfield, NH. The CMSI system will not permit a file to be stored unless all the CRA and HMDA information has been entered.
The base cost of Credit Review is $150,000 for a one- to 32-user license. Control Z's price starts at $50,000, and it varies with the number of users and modules bought.
As Barton describes it, the software has several screens for each loan application. Before a loan officer can proceed from one screen to the next, each piece of data required for CRA or HMDA must be entered. Without it, the loan officer can't complete the application.
Just One Step
But automating origination is only one step in a long process, and it falls well short of realizing the dream of an all-encompassing system. Such a system would take the application data, store it, retrieve and plot it against computerized census tract images, and finally transmit it to banking regulators in the format they've specified.
Why hasn't such a system been produced? One explanation stems from the state of software technology today. Systems integration, and transmitting information from one software application to another, are still a less than perfect science. Many programs in the compliance arena do one or two functions, but they don't readily share information with one another. Only a small percentage of banks employ the software engineers with the expertise to work around this.
Finally, even when a bank has mapped the data by census tract, it still isn't in the format that regulators want. For whatever reason, regulators and lenders have been talking two different languages.
The agencies responsible for fair lending exams--including the Federal Reserve, the Federal Deposit Insurance Corp. and the OCC--supply banks with pre-formatted computer diskettes which include a series of questions and simple spreadsheets. Banks use these to report their HMDA data every spring. Then, in the fall, the feds send back reports that analyze the banks' own filings.
Feds Compound the Problem
Oddly enough, the regulators don't follow a common format. This disparity is an accident of history. Industry standards for mortgage origination simply don't exist, says a spokesman for CFI ProServices Inc., a Portland, OR, developer of fair lending software. So software publishers, banks and regulators have typically gone in separate directions. The Mortgage Bankers Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. are all working on standardization initiatives, but it is unclear if they will harmonize their efforts.
In the meantime, progress is coming a step at a time. The latest version of FormAtion's Mortgage Publisher extracts data from applications and prepares it for filing with CRA and HMDA reports. In addition, the CMSI system Integra will install boasts a geocoding function, whereby street addresses are matched with their census tracts. However, Barton says Integra will have to modify Lakewood's Control Z before it can perform the geocoding function.
Once street addresses are geocoded, lenders can track their lending business for each neighborhood. Since the census records the median income for each tract, a bank can quickly assess its business in the low- to moderate-income neighborhoods targeted by the various fair lending laws.
Unfortunately, the majority of lenders will probably need to go much further, according to Jeff LaBar, a product manager with CFI ProServices.
Not only will lenders need to start bunching all manner of lending--including small business loans--under the CRA umbrella, but they will soon be called upon to train their regular branch staffs for the vagaries of CRA-type lending. Future versions of platform software will have to be sophisticated enough to assist lenders in meeting the special needs of lower-income borrowers.
And that's something banks can use to their advantage if they recognize the opportunity. "People automatically think that compliance costs them money," says Lance Gallagher, an assistant vice president for credit administration and loan operations at the $100-million-asset Bank of Lodi in Lodi, CA. "But with the mapping software, you're able to identify areas where you need to do business by ethnic group. Plus, it lets you go in with the product to match the census tract. If you have a tract that has a high concentration of business, then it's your SBA people who go in, and not your residential mortgage people."
Ultimately, the goal is to turn lending compliance into a marketing opportunity. But in the meantime, there are those reports to fill out.