Originally published in "The Fair Lending Update," September 7, 2005

As indicated by its staff members, the Federal Reserve Board’s (the "FRB") compilation and analysis of the 2004 HMDA data will be released on or about September 12. (Although the announced release date has changed several times during the summer, it now appears that September 12 may reasonably be relied upon for planning purposes.)

While many of our clients and other industry participants have completed analysis of their HMDA data, we thought it would be useful to suggest several pro-active steps to consider for the time period that will immediately follow the release of the HMDA data. In particular, we note that it will be during this critical timeframe that mortgage lenders will be particularly exposed to reputational risk – which may emanate from several sources.

First, plaintiffs’ attorneys have indicated that they may aggressively utilize the press to "litigate" claims in the media before a targeted lender has been afforded the opportunity to defend itself in the court of public opinion (with the intention, of course, to force a quick settlement in lawsuits to be filed).

Second, media representatives will likely focus on this issue as a highprofile story – or series of stories – in late September. (This will be facilitated by the FRB’s intention to issue the 2004 HMDA data in a very user-friendly format that will permit extensive investigations to be conducted over the Internet, as well as by a CD that will be available for a very nominal price.)

Third, we note that many lenders with exceptional fair lending records may be inadvertently attacked in the press because of the general lack of understanding of the HMDA data to be released, and because of the lack of an acceptable knowledge base that reporters who do not specialize in the financial industry will bring to the table.

To counter these and related real exposures to a lender’s reputational risk, we suggest the following:

  • Coordinate the Lender’s Story: We believe that it will be useful for a lender to coordinate – and probably, to centralize – the telling of its fair lending story and HMDA results. Perhaps for no other reason, we note that this is a complex and difficult area to understand and to translate into readily understandable information. Accordingly, providing lending offices and personnel with instructions for forwarding media and other inquiries to designated representatives of the lender might be beneficial.
  • Determine the Scope of Favorable News: Because this is a very complicated arena that is predicated on statistical data, most lenders have positive fair lending results that might be reported and highlighted. In the minimum, being able to point out favorable HMDA elements may assist in the drafting of a more balanced media presentation.
  • Consider Outreach to Media Representatives: We believe it is virtually certain that lenders operating in certain geographic areas will have their data reviewed – and their local fair lending results will probably be the subject of regional media inquiries. Lenders concerned about this possibility might wish to engage in a media outreach to identify reporters who will likely be responsible for such stories.
  • Securities Law Considerations: Although there may be an understandable desire to aggressively tell a positive story about a lender’s HMDA results, we caution public companies to balance any "good news" with their obligations under the federal and state securities disclosure laws. For example, in hindsight, an overly optimistic evaluation of a lender’s HMDA results could be alleged to be a material misstatement if litigation occurs.

While this could be a case in which no good deed (i.e. , addressing reputational harm) goes unpunished, walking this tightrope might be accomplished by reviewing and using model media presentations available from several mortgage trade associations.
  • Exercise Care Not to Waive Privilege: While all of the foregoing suggestions might minimize reputational risk immediately following the release of the 2004 HMDA data, if a lender elects to discuss its own HMDA data, care should be exercised lest a lender inadvertently waive the privilege on an otherwise confidential internal analysis of its HMDA data. Specifically, many lenders have conducted regression analyses to explain possible lending disparities based upon the raw HMDA data – and those analyses have been conducted in a manner intended to preserve the confidentiality of the data. A lender electing to share some or all of its internal analysis should exercise care so that it does not inadvertently waive the confidentiality of reports and analyses it does not wish to have disclosed.
  • Investigations by Governmental Authorities: Even though we are aware that the federal agencies have commenced reviewing under their respective jurisdictions the HMDA results of certain lenders whose raw HMDA data is not reasonably explainable, it is likely that lenders may face numerous inquiries from state regulators and attorneys general immediately following the release of the HMDA data on September 12.

Should such an inquiry be received, we strongly recommend immediate consultation with counsel to coordinate the interaction between public media pronouncements and responses to a governmental authority.
  • Civil Lawsuits: One possible scenario we have identified is that certain large plaintiffs’ law firms may attempt to file high-profile lawsuits in an effort to control the litigation (i.e. , by preventing their competitors from controlling the litigation by filing suit first.) Should this occur, we likewise recommend immediate consultation with counsel to determine appropriate alternatives to pursue.

This article is presented for informational purposes only and is not intended to constitute legal advice.