We would like to begin collecting information on our non-HMDA reportable loans in order to perform some type of self testing for Fair Lending that would include various comparative analysis of the data. In reading through 1002.5 of Reg B, it appears we would be required to disclose orally or in writing to the applicant that we are requesting this information and that they will not be required to provide the information, why we are collecting this information, and that we will not discriminate on the basis of this information. Is this the process other banks use to collect information regarding race, national origin, sex, and marital status on non HMDA reportable, consumer loans? Can we collect and retain this information by any other method without disclosing to the applicant that we are collecting this data on them? Any input is appreciated!

Sorry, but you are out of your minds to even think about doing this. There isn't one bank in a thousand that could put together or could afford to do a self-test as outlined in 1002.15 unless you thought you had some real serious problems.

This response made me laugh, but I agree with it. Depending on the size of your institution, you may be expected to perform self-testing, but not a 'self test' as described within Reg B. Self testing without the collection of information from the borrower would require proxy information. This would come from census bureau utilizing surnames or geographic information. Using this, you could 'guess' at the ethnicity, race or gender of an applicant. In addition, this is the method that most of the examiners will use.

Thank you for your comments. I would certainly agree with them, however, my question still remains.

You could, instead of collecting, use surrogates.

That's what I was thinking too... as Mr. Belvedere described above.

You cannot just start collecting prohibited data on loans to do testing. Plus, before engaging in any of this sort of testing, you need to get qualified legal counsel involved and get this all under attorney client privilege. They can help guide you.

This morning's FRB Outlook Live Webinar was on Indirect Auto Lending. It included comments on using high minority census tracts and Hispanic surnames. It is available at:

http://www.philadelphiafed.org/bank-resources/publications/consumer-compliance-outlook/outlook-live/

Well worth the hour to listen.

Al

From Richard Cordray - Director of the CFPB, Letter to Congress:

In reference to indirect auto lending reviews to be conducted by the CFPB.

“….The Bureau conducts its proxy analysis by using publicly available data from the Social Security Administration and the Census Bureau. We understand that many responsible lenders regularly use proxies in their own fair lending analysis where self-reported race, ethnicity, and gender data are unavailable. The Bureau has encouraged lenders who are not currently doing so to select a reasonable proxy method and to monitor their data for fair lending risk. “

http://www.infobytesblog.com/wp-content/uploads/2013/06/6-20-13-CFPB-Letter-on-Auto-Lending.pdf

Cordray and the CFPB are 'encouraging’ lenders to use the proxy method. Because the CFPB and other agencies will be pursuing legal action based on the use of proxies, a fair lending program should be analyzing the proxy data in order to identify and reduce risks as presented through the proxy information.

Thanks for your input and comments! We are trying to determine the route we will go with any testing and will most likely do some type of comparative analysis with the information we have available and any publicly available information we may have access to. We are also going to review this with our regulator for their comments and guidance.

IMHO -
Self-testing is a mixed blessing. You do identify opportunities to improve (a/k/a find your mistakes), but at the same time, the regulators can use every bit of the information against you. True, the exam guidelines say that they can be lenient, but the bank can be forced into a referral for every item it identifies.

And again, you need to get this under ACP - that will not shield it from the regulators, but it will (if done properly) shield it from discovery in a civil suit.