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

380 Pages·2008·2.6 MB·English

by  C. R. Abrahams

Abrahamsffirs 2 11/15/07 iii
F L C
AIR ENDING OMPLIANCE
I I C
NTELLIGENCE AND MPLICATIONS FOR REDIT
R M
ISK ANAGEMENT
C R. A
LARK BRAHAMS
M Z
INGYUAN HANG
JOHNWILEY&SONS,INC.
Abrahamsftoc2 11/10/07 viii
Abrahamsffirs 2 11/15/07 i
F L C
AIR ENDING OMPLIANCE
Abrahamsffirs 2 11/15/07 ii
Wiley & SAS Business Series
The Wiley & SAS Business Series presents books that help senior-level managers with their
critical management decisions.
Titles in the Wiley and SAS Business Series include:
Business Intelligence Competency Centers: A Team Approach to Maximizing Competitive Advan-
tage, by Gloria J. Miller, Dagmar Brautigam, and Stefanie Gerlach
CaseStudiesinPerformanceManagement:AGuidefromtheExperts, by Tony C. Adkins
CIOBestPractices:EnablingStrategicValuewithInformationTechnology, by Joe Stenzel
CreditRiskScorecards:DevelopingandImplementingIntelligentCreditScoring,byNaeemSiddiqi
CustomerDataIntegration:ReachingaSingleVersionoftheTruth, by Jill Dyche and Evan Levy
Information Revolution: Using the Information Evolution Model to Grow Your Business, by Jim
Davis, Gloria J. Miller, and Allan Russell
MarketingAutomation:PracticalStepstoMoreEffectiveDirectMarketing, by Jeff LeSueur
Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap), by Gary
Cokins
For more information on any of the above titles, please visit www.wiley.com.
Abrahamsffirs 2 11/15/07 iii
F L C
AIR ENDING OMPLIANCE
I I C
NTELLIGENCE AND MPLICATIONS FOR REDIT
R M
ISK ANAGEMENT
C R. A
LARK BRAHAMS
M Z
INGYUAN HANG
JOHNWILEY&SONS,INC.
Abrahamsffirs 2 11/15/07 iv
Thisbookisprintedonacid-freepaper.
Copyright2008bySASInstitute,Inc.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
PublishedsimultaneouslyinCanada.
WileyBicentennialLogo:RichardJ.Pacifico
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyanymeans,
electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunderSection107or108of
the1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthePublisher,orauthorization
throughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,
MA01923,978-750-8400,fax[phone],oronthewebatwww.copyright.com.RequeststothePublisherfor
permissionshouldbeaddressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,
NJ07030,201-748-6011,fax[phone],oronlineathttp://www.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsinpreparingthis
book,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyorcompletenessofthecontentsofthis
bookandspecificallydisclaimanyimpliedwarrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarranty
maybecreatedorextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescontainedherein
maynotbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neitherthepublisher
norauthorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedtospecial,
incidental,consequential,orotherdamages.
Forgeneralinformationonourotherproductsandservices,ortechnicalsupport,pleasecontactourCustomerCare
DepartmentwithintheUnitedStatesat800-762-2974,outsidetheUnitedStatesat317-572-3993orfax317-572-4002.
Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbeavailable
inelectronicformat.
FormoreinformationaboutWileyproducts,visitourWebsiteathttp://www.wiley.com.
LibraryofCongressCataloging-in-PublicationData:
Abrahams,ClarkR.,1951—
Fairlendingcompliance:intelligenceandimplicationsforcreditriskmanagement/
ClarkR.Abrahams,MingyuanZhang.
p.cm. —(Wiley&SASbusinessseries)
Includesindex.
ISBN978-0-470-16776-2 (cloth)
1. Credit—UnitedStates—Management.2. Riskmanagement—UnitedStates.3. Bank
loans.I.Zhang,Mingyuan,1960-II.Title.
HG3754.5.U6A272008
658.8(cid:1)8—dc22
2007026259
PrintedintheUnitedStatesofAmerica
10987654321
Abrahamsftoc2 11/10/07 v
C
ONTENTS
Foreword ix
Preface xiii
Acknowledgments xvii
1 Credit Access and Credit Risk 1
EnterpriseRiskManagement 2
LawsandRegulations 4
ChangingMarkets 6
PreparefortheChallenges 8
ReturnonCompliance 14
Appendix1A:TaxonomyofEnterpriseRisks 17
Appendix1B:MakingtheBusinessCase 18
2 Methodology and Elements of Risk and Compliance Intelligence 23
RoleofDatainFairLendingComplianceIntelligence 23
Sampling 29
TypesofStatisticalAnalysis 35
ComplianceSelf-TestingStrategyMatrix 36
CreditRiskManagementSelf-TestingStrategyMatrix 38
MatchingAppropriateStatisticalMethodstoRegulatory
ExaminationFactors 42
CaseforaSystematicApproach 43
Summary 44
Appendix 2A: FFIEC Fair Lending Examination Factors within Seven Broad
Categories 46
3 Analytic Process Initiation 51
UniversalPerformanceIndicator 51
OverallFramework 53
DefineDisparity 53
DeriveIndices 58
GenerateUniversalPerformanceIndicator 65
PerformanceMonitoring 75
Summary 80
Appendix3A:UPIApplicationExample:LiquidityRiskManagement 83
Abrahamsftoc2 11/10/07 vi
vi CONTENTS
4 Loan Pricing Analysis 85
UnderstandingLoanPricingModels 87
SystematicPricingAnalysisProcess 91
Overage/UnderageAnalysis 112
Overage/UnderageMonitoringOverview 123
Summary 125
Appendix4A:PricingAnalysisforHMDAData 126
Appendix4B:PricingandLoanTermsAdjustments 133
Appendix 4C: Overage/Underage Data Model (Restricted to Input Fields, by
Category) 137
Appendix4D:DetailedOverage/UnderageReporting 139
Appendix4E:SampleSizeDetermination 142
5 Regression Analysis for Compliance Testing 147
TraditionalMain-EffectsRegressionModelApproach 148
DynamicConditionalProcess 151
DCPModelingFramework 154
DCPApplication:ASimulation 168
Summary 180
Appendix5A:IllustrationofBootstrapEstimation 181
6 Alternative Credit Risk Models 183
CreditUnderwritingandPricing 184
OverviewofCreditRiskModels 185
HybridSystemConstruction 201
HybridSystemMaintenance 216
HybridUnderwritingModelswithTraditionalCreditInformation 222
HybridUnderwritingModelswithNontraditionalCredit
Information 234
HybridModelsandOverrideAnalysis 237
Summary 248
Appendix6A:LoanUnderwritingwithCreditScoring 250
Appendix6B:Log-LinearandLogisticRegressionModels 254
Appendix 6C: Additional Examples of Hybrid Models with Traditional Credit
Information 255
Appendix6D:GeneralOverrideMonitoringProcess 265
7 Multilayered Segmentation 267
SegmentationSchemesSupportingIntegratedViews 267
ProposedSegmentationApproach 269
Applications 275
Summary 297
Appendix7A:MathematicalUnderpinningsofBSM 298
Appendix7B:DataElementExamplesforDynamicRelationshipPricingExample 301
Abrahamsftoc2 11/10/07 vii
CONTENTS vii
8 Model Validation 305
ModelValidationforRiskandComplianceIntelligence 305
TypicalModelValidationProcess,Methods,Metrics,
andComponents 307
AnIntegratedModelValidationApproach 317
Summary 344
ClosingObservations 344
Index 347