Sorry folks, I got a little off schedule with all of the regulatory conferences and new regulations that hit over the last few weeks. I’m picking up my workflow discussions and this is the fourth in the series. The others are under “best practices” in the discussion group. As a refresher, I have taken the 10 fair lending trigger points and begun the process of workflow modeling with you. Each trigger points helps you prepare for the modeling by asking you questions about your operation. Through this process, you will have a better understanding about how to set up your procedures & policies, workflow and monitoring and have a compliance management system for each of the trigger points. Now back to the series!
Which loans receive approval, which don’t and how difficult was it, are the three themes to keep in mind when guarding against fair lending claims.
A fair lending examiner will review your approvals, denials and if they suspect issues, they will explore what was asked of one customer versus another for processing or conditions.
_____ Define where the approval and denial process begins. Many mortgage bankers have discounted a client’s credit worthiness at the level of the loan originator or the technology they use. For fair lending this may be a dangerous practice.
_____ Is it appropriate for a loan originator or processor to deny a client? If not, what is the process and procedure? Who fills out the adverse action? If so, what is the procedure for this and the monitoring to ensure compliance?
_____ Is the person in charge of sending the adverse action clear (and this should be in your procedures) as to what reason to select for the file? If not, this will cause you some big issues with your HMDA data.
_____ What responsibility does a direct supervisor have to mitigate the risk on this policy. Is there performance tied to compensation hits if the employee isn’t monitored on the front end?
_____ Have you defined the varying layers of your underwriting denial/approval process? For instance, what is the process for a pre-approval, pre-qualification, or loans submitted to underwriting?
____ _ If you are a wholesale lender, how are each of these denial/approval levels handled at the TPO level?
_____ What is your policy on a second review and where does that occur in the process? For instance, if a loan originator cannot deny a loan who does it go to? Is there branch manager authority, operations authority? If an underwriter denies a loan after it is processed, does another underwriter or supervisor review it? From a fair lending perspective, this type of policy protects your company from underwriter bias. Banking consultants who have been advising banks for years on fair lending policy strongly recommend this.
____ If an examiner looks at your client’s financial profile and compares that to another client with similar characteristics, will they see one loan approved and another not? As part of fair lending monitoring it is imperative that you look for these anomalies. If they exist, something is missing in the policy, procedure, training, workflow or monitoring that should be corrected.
_____Taking a deeper dive, look at the conditions issued or the requirements requested of similar clients. Does disparity exist?
_____ What data points from a file will be used for file comparison? These need to be defined and communicated to the underwriters so that they can occasionally test themselves.
_____ Policy & Procedures should be so tight around underwriting that any deviation is flagged, checked and notated. Inconsistencies in your underwriters will cause your company issues if not managed properly.
_____ When any deviation from policy or exception occurs, how is this tracked and documented. A compliance manager should never have to sit in an exam and find out from an examiner about exceptions. The compliance manager should have the information ahead of time and be able to demonstrate their compliance management system over this issue.
_____ Will any of your performance bonuses be based on consistency in underwriting? If so, what are they?
In the next discussion I’ll pose questions to begin the evaluation process for Marketing Disparity.