Regulatory Environments

Transcription

1 Analytics in Fair Lending and Regulatory Environments Deanna Neal First Vice-President Corporate Compliance SunTrust Bank Jeff Morrison First Vice-President Corporate Compliance SunTrust Bank #AnalyticsX C o p y r ig ht 201 6, SAS In sti tute In c. Al l r ig hts r ese rve d.

2 NEW OPPORTUNITIES IN STATISTICS: NAVIGATING THE REGULATORY ENVIRONMENT IN FAIR BANKING Traditional Statistics SAS programming Regression Analysis Clustering Text Mining The views expressed in this presentation are those of the authors, and do not represent the opinion of SunTrust Banks, Inc. or its subsidiaries SunTr ust Banks, Inc. SunTr ust is a federally r egistered trademark of SunTr ust Banks, Inc.

3 NAVIGATING THE REGULATORY ENVIRONMENT IN FAIR BANKING Fair and Responsible Banking The Fair Housing Act (FHA) was enacted in It prohibits discrimination by anyone during certain residential real estate transactions, including the following activities: Marketing Originating Pricing Underwriting Purchasing Selling Brokering Appraising 2

4 Fair and Responsible Banking NAVIGATING THE REGULATORY ENVIRONMENT IN FAIR BANKING The Fair Housing Act and U.S. Department of Housing and Urban Development regulations prohibit discrimination based on the following customer characteristics: Race MASTER Color TITLE STYLE National Origin Religion Sex Familial Status Handicap or Disability, including parental or family leave Sexual orientation or gender identity not explicitly covered, but housing discrimination against LGBTQ persons may be covered if it is based on non-conformity to gender stereotypes (discrimination on the basis of sex); fear of HIV/AIDS (discrimination on the basis of disability); or assumptions about marital or familial status. 3

5 Fair and Responsible Banking NAVIGATING THE REGULATORY ENVIRONMENT IN FAIR BANKING The Equal Credit Opportunity Act (ECOA) was enacted in 1974 to prohibit creditors from discriminating in any credit transaction, such as: Mortgages MASTER Small business TITLE loans Overdraft credit, including courtesy STYLE overdrafts Consumer loans (automobile, home equity lines/loans, credit cards) Loan modifications ECOA prohibits discrimination on the basis of: Race Color National Origin Religion Sex, including maternity or family leave Marital Status Age (provided the applicant can legally contract) Receipt of income from public assistance Exercise of rights under the Consumer Credit Protection Act 4

6 NAVIGATING THE REGULATORY ENVIRONMENT IN FAIR BANKING Fair and Responsible Banking Dodd-Frank Consumer Protection and Wall St. Reform Act of 2010 prudential regulators and FTC enforces UDAP. Among other effects, the Dodd-Frank Consumer Protection and Wall St. Reform Act of 2010 (Dodd-Frank Act) expanded the definition of unfair and deceptive acts. The CFPB enforces UDAAP, while the Unfair, deceptive, or abusive acts and practices (UDAAPs) can cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace. Under the Dodd-Frank Act, it is unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive, or abusive acts or practices. Consumer complaints play an important role in regulatory reviews and detection of unfair, deceptive, or abusive practices, as do high volumes of charge-backs or refunds for products or services. 5

7 PROXY FOR RACE / ETHNICITY FOR NON-MORTGAGE PRODUCTS Bayesian Improved Surname Geocoding (BISG) by CFPB CLICK Official TO CFPB Document: EDIT methodology.pdf This methodology mathematically combines (weights) last name frequencies and census tract and block demographic information into probabilities of an individual being a member of one of six racial or ethnic categories Census tables provided by CFPB in the public domain as well as implementation code. Requires the data to be geocoded using standard address formats along with the last name of the primary borrower and co-borrower 6

8 EXAMPLE OF GEOCODING / BISG IMPUTATION PROCESS Data needed: Name and Address Information for Geocoding and BISG Imputation Data returned: BISG Imputation and Gender Note: Information is fictitious and for illustrative purposes only 7

9 FAIR LENDING STATISTICAL REVIEW OF UNDERWRITING, PRICING Purpose Methodology underwriting or pricing decisions Check for potential disparate impact on minorities due to Logistic Regression, Linear Regression Means Test For underwriting, dependent variable =Probability of Decline For pricing, dependent variable = APR or discretionary component of pricing Implement BISG (Bayesian Improved Surname Geocoding) Statistical Results Difference in Average Decline Rate or Average Price between Whites and Minority or Protected Class Results from Regression Analysis Outlier Review, Random Sample, or Matched Pairs 8

10 FAIR LENDING STATISTICAL REVIEW OF UNDERWRITING POLICIES Create a Decline Event by assigning each applicant a value of 1 if Initial Credit Decision= Decline Methodology if Approve or Incomplete, assign a value of 0; else remove from sample Calculate BISG Probabilities for Whites, Blacks, Hispanics, Asians, American Indians, and Multi-race using Geocoding, Surname Lists, and the CFPB computer program. (pr_black, pr_hispanic, etc. 1 6 = 1) Assign Gender by using from name list or geocoding software (WIZ, Social Security or Census name lists, etc.) Apply Statistical Methods against Decline Event using control variables (custom score, FICO, etc.) for underwriting along with BISG data. Control variables should include credit policy quantitative mapping (FICO minimums, etc.) 9

11 FAIR LENDING STATISTICAL REVIEW OF UNDERWRITING, PRICING Declines=~20k MASTER TITLE Approvals=~50k STYLE Findings / Results Illustrative Example Decline Event for Underwriting Decision Simple Means Test Significant Differences? Use BISG to assign membership in demographic group Decline Means for Blacks (0.9) Whites (0.6) Decline Means for Hispanics (0.8) Whites (0.6) Decline Means for Asians (0.7) Whites (0.6) Regression Results Potential Issues Without Controls (BISG only) With Controls (Custom Score, FICO minimums, Joint Status, Gender, Overrides, DTI, etc.) 10

12 EXAMPLE OF POTENTIAL DISPARITY BISG ONLY (OMIT BISG FOR WHITES) Standard Estimate Error Parameter Logistic Regression: BISG Only Wald Chi- Square Pr > Chi Sq Intercept <.0001 pr_black <.0001 pr_hispanic <.0001 pr_api <.0001 pr_aian <.0001 pr_mult_other <.0001 Note: Above results are fictitious and for illustrative purposes only 11

13 EXAMPLE OF POTENTIAL DISPARITY ADD CONTROL VARIABLES - MASTER TITLE -- STYLE Parameter Logistic Regression: BISG + Control (Credit) Variables Estimate Standard Error Wald Chi- Square Pr > Chi Sq Intercept pr_black <.0001 pr_hispanic <.0001 pr_api pr_aian pr_mult_other Gender_Female Gender_Missing Gender_Joint <.0001 Average Credit Score <.0001 Minimum FICO <.0001 Debt to Income <.0001 Channel Dummy Override Year_dum Self Employment Dummy QTR QTR QTR Note: Above results are fictitious and for illustrative purposes only 12

14 True Positives True Positives CLASSIFICATION ACCURACY PREDICTED DECLINE EVENT No Control Variables With Underwriting Controls Poor information content Excellent information content False Positives Legend: Area Under Curve 90-1 = excellent (A) = good (B) = fair (C) = poor (D) = fail (F) False Positives 13

15 CASE STUDY REQUESTED LOAN (PRICING: APR) No Control Variables Variable Coefficient Significance FIT reduced. Black < Hispanic < Asian < Female... Results from Regression Analysis show disparities above the acceptable threshold for all protected classes using no controls other than BISG probabilities. By using pricing control variables, such as credit quality and collateral information, the disparities are significantly With Pricing Control Variables Coefficient Comparison Variable Coefficient Significance FIT Black Hispanic Asian Female < Note: Above results are fictitious and for illustrative purposes only 14

16 Matched Pair # CASE STUDY REQUESTED LOAN Pricing Matched Pair Review MASTER Protected TITLE Loan to STYLE Class FICO Term APR Value 11 White % Black % White % Hispanic % White % Asian % White % Black % White % Hispanic % Key variables used to determine similarly situated protected class FICO Term Loan to Value Conduct Manual File Review Manually review applications of the matched pairs to determine if there are factors not captured in the data file which could explain the variance in markup. Note: Above results are fictitious and for illustrative purposes only 15

17 NAVIGATING THE REGULATORY ENVIRONMENT IN FAIR BANKING Fair Lending vs. Traditional Models / Tools or Controls Traditional official business need Fair Lending regulatory screening tool MASTER Traditional TITLE forward looking STYLE Fair Lending forensic in nature Traditional weight of evidence, binning Fair Lending quantifying policy variables Traditional outlier analysis Fair Lending outlier analysis (DFBETAs, Cook s D) Traditional model validation (hold-out), stress testing Fair Lending forensic file reviews 16

18 TEXT MINING AND COMPLAINT ANALYSIS (PROOF OF CONCEPT APPROACH)

19 COMPLAINT ANALYSIS USING TEXT MINING Purpose Determine Feasibility of Predicting Complaint Resolutions Potentially Facilitate Work Priority Sampling for Review Methodology Closed Complaint Data Clean & Organize Complaint Narratives Determine Additional Predictors K Nearest Neighbor Classification (KNN) Preliminary Results Suggest Prediction Variables Word Clouds of Complaint Narratives KNN Classification Accuracy Supporting Paper, Implementation 18

20 COMPLAINT PATTERN NARRATIVES (EXAMPLES ARE FICTITIOUS) Example where NO ACTION REQUIRED was found Customer wants to submit a complaint because she is waiting for her closing of her refi since 04/15 and it is taking too long for the mortgage to close. The loan officer is XXX. Example where POTENTIAL EXCEPTION was found The customer complained that a branch employee refused to cash a check. Customer is a long-term client, and noticed that checks were cashed for white clients while she was being refused service. Customer is upset and complains that teller was rude and disrespectful. 19

21 WORD CLOUDS BY CLASSIFICATION Classification = No Action Classification = Action 20

22 WORD FREQUENCY BY CLASSIFICATION 21

23 CREATION / IDENTIFICATION OF ADDITIONAL PREDICTORS Classification Outcome: No Action Required vs. Action Required Some Information Content (AUC=.68)

24 KNN NEAREST NEIGHBOR CLASSIFICATION Data is mathematically mapped to Euclidian distances Class assignment made by proximity to nearest neighboring data points Here, point c is closer to the o points rather than the a points, so it is classified as an o Here, 2 out of 3 votes are cast for group O 23

25 MODELING DATA WAS SPLIT INTO 2 PARTITIONS 2/3 rds of data used to train (calibrate) model 1/3 rd of data used to test (i.e. validate) model MODEL CORRECTLY CLASSIFIES ALMOST ALL OF THE TEST NO ACTION GROUP AND ABOUT HALF OF THE TEST ACTION GROUP 24

26 CORRECTLY CLASSIFYING ACTION COMPLAINTS AS ACTION Model apparently picks up on complaint narratives that are more complex and wordy, classifying them as Action events, all other things remaining equal. Complaints that contain High Risk Terms, Tier 2, , and CRT 25

27 USING PROBABILITY OF ACTION NEEDED TO RANK ORDER COMPLAINTS Similar to a credit score, we can compute the probabilities of each classification and rank order them from high to low to select samples for review and auditing. Below we found about 75% of the action needed complaints in the first two deciles (20%) ranked by their probability. 26

28 #AnalyticsX C o p y r ig ht 201 6, SAS In sti tute In c. Al l r ig hts r ese rve d.