Traditional fair lending review is backwards! That’s right, I said it and just caused a gasp from the fair lending traditionalists out there. Yet before you write me off, hear me out because protecting the consumer and their access to credit does not need to be so complex!
Fair Lending is about protecting the interest of the consumer. This means the individual consumer and groups of consumers who may be denied access to credit. So why is it that so much time is spent analyzing how consumers are treated AFTER they receive, or do not receive credit? Versus time, effort, money and training spent on analyzing the treatment of consumers Before, During, and then after the consumer does or does not apply with your company.
Now I know it’s hard to break with tradition. After all, we’ve been doing it this way for so long, why upset the Apple cart? In fact, even the examiners look at fair lending this way so why shouldn’t you? Well the answer to that is really quite simple. Times, Technology and Regulatory Oversight have ALL evolved and as such we need to as well. Mathematicians used solve problems with lines on a wall, then an abacus, followed by a calculator and they now use computers for much of their work. After years of using outdated techniques, it’s time to use the tools that will help us prevent issues, before they occur, versus fix issues after they occur.
Let’s take a look at a few examples of where the look-backs are counter-intuitive:
- Pricing Discretion– Pricing discretion should be part of your policy, consistent in format (meaning not each loan officer or branch manager does their own thing) and monitored at the time of lock in. For instance, how is the originator using their discretion? Is there a pattern of practice that would indicate they are using discretion for all types of clients versus just certain types of clients? What does it look like for all of your originators together in an MSA? Are there patterns that need to be talked about?
- Pricing Exceptions and Underwriting Exceptions-Are you looking at exceptions at the time they are happening? Are you bi-furcating by originator or underwriter to pick up any problematic patterns or practice?
- Pricing Disparity– This one is easy! If you do not have your pricing locked down so that individual originator compensation levels do not affect the end rate/price to the consumer, you have an issue! Clean that up now and thank me later!
- Redlining-Do you know where you are doing business? Look at the business in each of your MSA’s if you are a mortgage banker and in your CRA Assessment area if you are a bank. Does it look like you avoid high minority areas? If so, that will be an issue and mitigation strategies should be put in place.
- Employee Conversations with Consumers– There used to be a time when branch managers and regional managers focused on the quality of the personnel in the office and not full-time recruiting. If companies spent more time and training on what the employees say to the consumer, and referral partners, the entire company would have far less to worry about. In my mind, this is the number one issue lenders face today. They have little idea what their front line staff is saying, and many people in the front line have no idea they are saying the wrong things.
- Mystery Shopping is taking off like wildfire right now. Chances are good that they are calling and visiting you right now. If you are not doing the same so that you can detect training and remediation issues, you are gambling your company’s future away. It is a messy and expensive issue to clean up. Just ask Bancorp South or read their recent settlement and you will learn first-hand.
With minimal and strong pro-active protocols in place you will not have to be concerned about what the HMDA data says about your company. You will already know, and have corrected any practices that started to predict a pattern which positions you as a lender with great oversight. And this my friends is exactly when you can get back to the business of originating loans, doing business and being profitable versus cleaning up behind you!
There are real and easy solutions, so call me if you want to clean up your Fair Lending concerns!