If you read our article about the 5 Potholes of Fair Lending, I mentioned that one of the potholes is using fair lending software as a monitoring tool.
Let me be clear! Fair Lending Software will help you scope for problems you need to consider fixing, but it WILL NOT fix or give you the “why” behind the problem!
In my consulting practice, here is what I typically see
- Understands the Federal Requirement to Monitor Fair Lending Practices
- Buys fair lending software
- Imports their HMDA data
- Runs a massive report from the software and tries to explain 40+ pages of information to the Executive team about why there is a problem.
- Believes that they are properly monitoring for fair lending.
I am not opposed to fair lending software. Quite the contrary, I think it can help you scope for issues or help you review how your company is performing year-over-year. These reports help you focus on and prioritize glaring issues vs. all issues. Yet, it is crucial to understand that scoping and monitoring are very different!
Scoping and Monitoring are Two Very Different Methods!
Fair lending monitoring has changed dramatically since the updated requirements of HMDA in 2018. Now, the regulators can look at each company and compare each company to others at a much more granular level. When change happens in reporting, change must also evolve in monitoring.
The fair lending manager then needs to get to the “why” of any issues and monitor at a more granular level than a software currently provides.
Excellent Fair Lending Monitoring requires collating all of the metrics that should be monitored into one place. This tool could be a spreadsheet or a business intelligence dashboard. Once that is in place, then and only then can you determine why you may have:
- Pricing Disparity
- Fee Disparity
- Pricing Exceptions That are Too High
Once the appropriate data is collated into one area, the fair lending manager can now visually view what may be causing the issue scoped out by the software.
For instance, let’s say your reports show that you charge higher interest rates to minority borrowers. If a regulator asked you why I suspect that many of you would not be prepared to answer that question thoroughly due to a lack of understanding or data from your price stack. Some may try to justify that the results of the report are due to risk adjustments. What is more likely to cause the variation is the price stack, including LO comp, Branch Margins, Product Margins, or Fees, combined with Pricing Exceptions. This complexity requires most lenders to investigate and monitor their practices much more deeply.
Once the “why” is determined, the compliance team can distill the intel into 3-4 PowerPoint slides. More concise data helps the fair lending manager better communicate the issue to the Executive Team and the possible solution to the problem.
Following is the type of information that should go into an aggregated monitoring tool/spreadsheet/dashboard vs. disparate reports that you gather from various departments.
- LO Comp by LO and how it affects the pricing stack
- Branch Margins added to the pricing
- Product Margins by loan type
- Fees by Branch or LO
- Pricing Exceptions
If you need assistance in developing a robust monitoring tool, Fair Lending Diversity has helped many lenders develop these tools. Please contact us at email@example.com