Fair Lending Compliance: Intelligence and Implications for Credit Risk Management (Wiley and SAS Business Series)

Praise for Fair Lending ComplianceIntelligence and Implications for Credit Risk Management "Brilliant and informative. An in-depth look at innovative approaches to credit risk management written by industry practitioners. This publication will serve as an essential reference text for those who wish to make credit accessible to underserved consumers. It is comprehensive and clearly written." --The Honorable Rodney E. Hood "Abrahams and Zhang's timely treatise is a must-read for all those interested in the critical role of credit in the economy. They ably explore the intersection of credit access and credit risk, suggesting a hybrid approach of human judgment and computer models as the necessary path to balanced and fair lending. In an environment of rapidly changing consumer demographics, as well as regulatory reform initiatives, this book suggests new analytical models by which to provide credit to ensure compliance and to manage enterprise risk." --Frank A. Hirsch Jr., Nelson Mullins Riley & Scarborough LLP Financial Services Attorney and former general counsel for Centura Banks, Inc. "This book tackles head on the market failures that our current risk management systems need to address. Not only do Abrahams and Zhang adeptly articulate why we can and should improve our systems, they provide the analytic evidence, and the steps toward implementations. Fair Lending Compliance fills a much-needed gap in the field. If implemented systematically, this thought leadership will lead to improvements in fair lending practices for all Americans." --Alyssa Stewart Lee, Deputy Director, Urban Markets Initiative The Brookings Institution "[Fair Lending Compliance]...provides a unique blend of qualitative and quantitative guidance to two kinds of financial institutions: those that just need a little help in staying on the right side of complex fair housing regulations; and those that aspire to industry leadership in profitably and responsibly serving the unmet credit needs of diverse businesses and consumers in America's emerging domestic markets." --Michael A. Stegman, PhD, The John D. and Catherine T. MacArthur Foundation, Duncan MacRae '09 and Rebecca Kyle MacRae Professor of Public Policy Emeritus, University of North Carolina at Chapel Hill FAIR LENDING COMPLIANCE......Page 6 0470167769......Page 1 CONTENTS......Page 8 FOREWORD......Page 12 PREFACE......Page 16 ORGANIZATION OF TOPICS......Page 18 WHO CAN BENEFIT FROM THIS BOOK......Page 19 ACKNOWLEDGMENTS......Page 20 CHAPTER 1: CREIDT ACCESS AND CREDIT RISK......Page 24 ENTERPRISE RISK MANAGEMENT......Page 25 LAWS AND REGULATIONS......Page 27 CHANGING MARKETS......Page 29 PREPARE FOR THE CHALLENGES......Page 31 RETURN ON COMPLIANCE......Page 37 Appendix 1A......Page 40 Appendix 1B......Page 41 ROLE OF DATA IN FAIR LENDING COMPLIANCE INTELLIGENCE......Page 46 SAMPLING......Page 52 TYPES OF STATISTICAL ANALYSIS......Page 58 COMPLIANCE SELF-TESTING STRATEGY MATRIX......Page 59 CREDIT RISK MANAGEMENT SELF-TESTING STRATEGY MATRIX......Page 61 MATCHING APPROPRIATE STATISTICAL METHODS TO REGULATORY EXAMINATION FACTORS......Page 65 CASE FOR A SYSTEMATIC APPROACH......Page 66 SUMMARY......Page 67 Appendix 2A......Page 69 UNIVERSAL PERFORMANCE INDICATOR......Page 74 DEFINE DISPARITY......Page 76 DERIVE INDICES......Page 81 GENERATE UNIVERSAL PERFORMANCE INDICATOR......Page 88 PERFORMANCE MONITORING......Page 98 SUMMARY......Page 103 Appendix 3A......Page 106 CHAPTER 4: LOAN PRICING ANALYSIS......Page 108 UNDERSTANDING LOAN PRICING MODELS......Page 110 SYSTEMATIC PRICING ANALYSIS PROCESS......Page 114 OVERAGE/UNDERAGE ANALYSIS......Page 135 OVERAGE/UNDERAGE MONITORING OVERVIEW......Page 146 SUMMARY......Page 148 Appendix 4A......Page 149 Appendix 4B......Page 156 Appendix 4C......Page 160 Appendix 4D......Page 162 Appendix 4E......Page 165 CHAPTER 5: REGRESSION ANALYSIS FOR COMPIANCE TESTING......Page 170 TRADITIONAL MAIN-EFFECTS REGRESSION MODEL APPROACH......Page 171 DYNAMIC CONDITIONAL PROCESS......Page 174 DCP MODELING FRAMEWORK......Page 177 DCP APPLICATION: A SIMULATION......Page 191 SUMMARY......Page 203 Appendix 5A......Page 204 CHAPTER 6: ALTERNATIVE CREDIT RISK MODELS......Page 206 CREDIT UNDERWRITING AND PRICING......Page 207 OVERVIEW OF CREDIT RISK MODELS......Page 208 HYBRID SYSTEM CONSTRUCTION......Page 224 HYBRID SYSTEM MAINTENANCE......Page 239 HYBRID UNDERWRITING MODELS WITH TRADITIONAL CREDIT INFORMATION......Page 245 HYBRID UNDERWRITING MODELS WITH NONTRADITIONAL CREDIT INFORMATION......Page 257 HYBRID MODELS AND OVERRIDE ANALYSIS......Page 260 SUMMARY......Page 271 Appendix 6A......Page 273 Appendix 6B......Page 277 Appendix 6C......Page 278 Appendix 6D......Page 288 SEGMENTATION SCHEMES SUPPORTING INTEGRATED VIEWS......Page 290 PROPOSED SEGMENTATION APPROACH......Page 292 APPLICATIONS......Page 298 SUMMARY......Page 320 Appendix 7A......Page 321 Appendix 7B......Page 324 MODEL VALIDATION FOR RISK AND COMPLIANCE INTELLIGENCE......Page 328 TYPICAL MODEL VALIDATION PROCESS, METHODS, METRICS, AND COMPONENTS......Page 330 AN INTEGRATED MODEL VALIDATION APPROACH......Page 340 CLOSING OBSERVATIONS......Page 367 INDEX......Page 370

Praise for

Fair Lending ComplianceIntelligence and Implications for Credit Risk Management

"Brilliant and informative. An in-depth look at innovative approaches to credit risk management written by industry practitioners. This publication will serve as an essential reference text for those who wish to make credit accessible to underserved consumers. It is comprehensive and clearly written."
—The Honorable Rodney E. Hood

"Abrahams and Zhang's timely treatise is a must-read for all those interested in the critical role of credit in the economy. They ably explore the intersection of credit access and credit risk, suggesting a hybrid approach of human judgment and computer models as the necessary path to balanced and fair lending. In an environment of rapidly changing consumer demographics, as well as regulatory reform initiatives, this book suggests new analytical models by which to provide credit to ensure compliance and to manage enterprise risk."
—Frank A. Hirsch Jr., Nelson Mullins Riley & Scarborough LLP Financial Services Attorney and former general counsel for Centura Banks, Inc.

"This book tackles head on the market failures that our current risk management systems need to address. Not only do Abrahams and Zhang adeptly articulate why we can and should improve our systems, they provide the analytic evidence, and the steps toward implementations. Fair Lending Compliance fills a much-needed gap in the field. If implemented systematically, this thought leadership will lead to improvements in fair lending practices for all Americans."
—Alyssa Stewart Lee, Deputy Director, Urban Markets Initiative The BrookingsInstitution

"[Fair Lending Compliance]...provides a unique blend of qualitative and quantitative guidance to two kinds of financial institutions: those that just need a little help in staying on the right side of complex fair housing regulations; and those that aspire to industry leadership in profitably and responsibly serving the unmet credit needs of diverse businesses and consumers in America's emerging domestic markets."
—Michael A. Stegman, PhD, The John D. and Catherine T. MacArthur Foundation, Duncan MacRae '09 and Rebecca Kyle MacRae Professor of Public Policy Emeritus, University of North Carolina at Chapel Hill

"Fair Lending Compliance: Intelligence and Implications for Credit Risk Management explores the overlap between fair lending and credit risk in order for lenders to provide greater and more affordable access to credit while operating within acceptable risk/return thresholds. With coverage of fair lending compliance specific to consumer and small business credit risk management, this innovative and timely work shows how various groups and organizations, as well as forward-thinking risk officers, can work to close the information gap for millions of Americans by maximizing the value of emerging nontraditional data sets for their institutions." "Written for corporate executives, loan officers, compliance and credit risk managers, and information technology professionals, as well as lawyers, legislators, federal and state regulators, researchers, and academics." Praise for Fair Lending Compliance Intelligence and Implications for Credit Risk Management""Brilliant and informative. An in-depth look at innovative approaches to credit risk management written by industry practitioners. This publication will serve as an essential reference text for those who wish to make credit accessible to under served consumers. It is comprehensive and clearly written.""--The Honorable Rodney E. Hood""Abrahams and Zhang's timely treatise is a must-read for all those interested in the critical role of credit in the economy. They ably explore the "Fair Lending Compliance provides coverage of traditional approaches coupled with several pioneering breakthroughs in methodology and technology that can enable all stakeholders to gain a broader and deeper understanding of fair lending analysis and develop more effective, more efficient, and better coordinated compliance self-assessment programs and credit risk management systems."--BOOK JACKET