“We cannot solve our problems with the same thinking we used when we created them.”- Albert Einstein
When was the last time you really took a look at where your business is coming from? In fair lending analysis this understanding of your market must become a regular practice and here is why.
Redlining is a hot-hot issue with the regulators. Bankers are experiencing case after case of Redlining violations and mortgage bankers are next on the docket. Redlining is the practice of arbitrarily denying or limiting financial services to specific neighborhoods, generally because its residents are people of color or in a lower socio-economic status’. The bottom line is that lenders generally perceive loans in these areas as being a higher risk or non-profitable. From my experience, their perception is wrong, because they approach this market with the wrong strategy!
Historically, mortgage bankers did not worry about diversity in lending or Redlining. They simply recruited to a market, and typically those markets are areas with higher loan amounts. Banks on the other hand are regulated to offer access to credit in a defined assessment area. Failure to lend in both well-served and under-served areas, of their assessment area, results in claims of Redlining by their prudential regulators.
And now the tide has shifted. Mortgage bankers are quickly learning that lack of diversity in their lending areas will result in big problems with the CFPB. Mortgage bankers now have to learn the techniques that banks have had to struggle with over the years, to get more loans in under-served markets. Banks will also struggle with this issue because buying loans in those areas is becoming more problematic with the new HMDA tracking. Both need a rock solid strategy to make loans with acceptable risk tolerance and keep their bottom line solid!
So let’s talk a little bit about strategy and why it is important to your success in this market. When faced with this issue I find that many lenders decide that the easiest way to cure the issue is to throw people into the market or buy leads. Both of those strategies will cause issues with your fair lending statistics and not achieve your goals!
In order to set up a Fair Lending strategy, one of the first tasks I take on is a solid review of where the lender’s present business is coming from. I visually show them their production by mapping their actual production on a map, by census tract, within their assessment area. This gives the lender a holistic overview of where they are currently generating loans. It also clearly identifies any “holes” in their production. From this first layer of analysis, I then produce a visual representation of their production by showing the racial distribution in the “holes”, and the racial distribution in their present areas of production. When this is done, it accomplishes two things:
- The lender can clearly see the gap in their production and this becomes the target market.
- Due diligence is demonstrated to the examiner, by performing the same types of analysis that an examiner would perform.
Next, we take a look at how their peers are performing in that area, because this is how the examiner will compare you. The examiners will take a look at your penetration in these markets and compare you to the penetration in those markets by your peers. If you fall below your peer averages, then you move to the top of the “suspect” list for the regulators. They will want answers as to why other lenders can perform in those markets and your company cannot. This is why you find any potential problem first, build strategy and action plans around resolving it, and then move toward resolution. Examiners like to see that you are trying, and if you are trying they try to be nicer! You see, it’s a win-win!
Quick Hit #2 is -Understand where you lend and where you may need to step up production!
If you missed any other Quick Tips, we have them all posted on this blog.
Stay Tuned for Quick Hit #3!