Data Driven Supervision and Fair Lending Risk Management: Updates from a Wisconsin Economic Development Forum

By Aaron Brown, Steve Kuehl, and Josie Link

The Federal Reserve Bank of Chicago’s Community Development division regularly holds economic development forums around the Seventh District that provide both a general economic overview and focus on topics of interest to stakeholders. On May 23rd, the topic was “Updates on the Midwest Economy & Data Driven Supervision and Fair Lending Risk Management.”

Bill Testa, Vice President and Director of Regional Programs at the Federal Reserve Bank of Chicago, made the following key points regarding the current state of both the U.S. and Wisconsin’s economy:

  • The U.S. economy is on a strong trajectory for the remainder of 2018 and into 2019. First quarter growth will likely be weak as consumer spending took a partial pause following a very strong fourth quarter 2017. Upward revision to Q4 2017 GDP estimate together with strengthening business and consumer optimism has led to high economic expectations for 2018. The consumer sector shows sign of rebound as consumer sentiment increased to 14-year high in April, aided by rising wages and strength in the labor markets. Business activity (Investment and Export Recovery) remains strong especially in manufacturing, though the prospect of a high tariff environment has added to market volatility and business uncertainty.
  • Strengthening in both the global economy and the pace of business investment activity domestically has translated into a healthy pace of expansion in much of the Midwest. Manufacturing in the region is leading the expansion (see Chart 1). Auto production remains at high levels while traditional capital goods and materials industries are growing. Production agriculture has dampened farm income, however, as commodity  prices have fallen.
  • Wisconsin’s economy has regained momentum along with Midwest manufacturing and U.S. export activity. Tight labor markets and demand for skilled workers are causing concerns among many Wisconsin employers. Such concerns extend far into the future as well. Migration from Midwest to the Sunbelt has accelerated. Meanwhile, falling rates of working age population and limits on immigration are expected to keep labor markets tight into the coming decades, especially outside of large cities.
  • In the large scheme of things, and following nine years of expansion, the U.S. economy is running close to its potential as labor markets tighten. Wage and price growth are firming while inflation (and expectations) have closed in on the Fed’s two-percent long-term objective (Chart 2).
  • Many forecasts of the U.S. economy have been revised higher for this year and next year due to the added fiscal stimulus attendant fromt tax cuts and expanded federal spending. The downside is that fiscal actions have likely added to future federal government deficits and debt levels, which will require repayment in later years.

Scott Grotewold, Fair Lending Risk Specialist at the Federal Reserve Bank of Chicago, made the following key points regarding data driven supervision and fair lending risk management:

  • Bank examiners can approach fair lending oversight with data-driven supervision through a variety of resources, including Home Mortgage Disclosure Act (HMDA) and Community Reinvestment Act (CRA) data, ALERT/Loan Trial, branching information, marketing/outreach/community development activities, exception/override logs maintained by the financial institution, complaints, and acquisitions/mergers. While “data-driven” usually is synonymous with numbers, the wide range of information sources illustrate how compliance officers use many different types of tools at their disposal.
  • The collection of publicly available data, such as HMDA data or CRA exam reports, has expanded recently. New HMDA rules, effective January 1, 2018, added 25 new data elements, while modifying and expanding other elements. Certain of the new elements, such as debt-to-income ratio (DTI), the combined loan-to-value ratio (CLTV), credit score, and automated underwriting system (AUS) results, will provide regulators and enforcement agencies information about lending practices that is currently only available in a loan file-by-loan file review. Thus, the expanded dataset gives examination staff the ability to assess the data quickly. Examiners can also assess fair lending risk through volume/trends, the nature of pricing and underwriting, assessment/market areas, control environment, and quality of the Fair Lending Program.
  • A successful fair lending program includes board and management oversight, as well as, a clear compliance program. Board and management oversight should include change management, risk management, and self-identification/corrective action. The compliance program should contain clear policies and procedures, consistent training, active monitoring, and complaint resolution. To mitigate fair lending risk around the bank’s delineated assessment area, examiners should monitor demographics, assessment area changes, lending, branch or loan production office locations, and marketing/outreach.

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