“Admit your errors before someone else exaggerates them”- Andrew V. Mason
Now that is a great quote! When you read a lot of settlements or actions taken by the CFPB or the Department of Justice, they do a great job of accentuating certain points. I call these teaching moments. The lenders that pay attention to these teaching moments can make changes before they bubble up as the next example of what not to do. When you talk to the lenders involved in these settlements and actions, you find out that those statements tend to be an inflated opinion of the actual event. Never the less, it is still out there and still of public record!
Second reviews are next up on the Quick Hit Tip list, and are necessary because we are all humans and we have bad days! Even technology has bad days! When you multiply the chance of having a bad day by the number of people making decisions about a consumer’s prospect for getting a loan, then this leaves you with a lot of risk on a daily basis. Just like any risk, you have to find ways to mitigate this risk to avert disaster; especially when it comes to fair lending and consumer treatment. Consistency in the application of your policies with carefully monitored second reviews are your best friend.
Quick Hit Tip #7 is Second Review Protocols
When the words “second reviews” are mentioned, many people think of underwriting; but there are other areas that need second review protocols as well.
Pre-Approval and Pre-Qualifications
As mentioned in Quick Hit #5, you likely have an issue with leaking revenue from those lost opportunities for borrowers that don’t qualify now. Or, of a bigger concern relating to fair lending, are the borrowers who do qualify and they are not served by your originators properly. This happens because they don’t see good income opportunity or perceive the transaction to be too difficult. So what is a lender to do?
-Face the fact that if your originators are paid 100% commission, they are likely to focus their efforts on those tasks that yield greater financial reward to them. The best way you can mitigate this risk is to give them someone who can help the client. If they have an outlet, then they are not as likely to “hide” the borrower inquiry.
-Do you have language that you teach originators so that they are not breaking the “discouragement” part of ECOA? How do you handle turn downs at the branch level? I see and hear a lot of crazy things happening in the field, so understanding how this is handled by your front line is hugely important.
-Develop your risk mitigation plan for ensuring that you are not losing borrowers who are qualified, but may take a little more work or time? There are some great ways to handle this, but like all plans it requires some strategy. One example is to house a salary paid originator who is the go-to person for loans that the commissioned originators let slide. The customer gets great service from your company, you prevent consumer complaints and you service your consumers equally.
Underwriting is the next most important area for second reviews. Think about this from the consumer’s perspective. An originator accepted your loan. They asked you for a whole bunch of papers, and you complied with that. In fact, you have probably paid for an appraisal and credit report. Then the loan gets all the way to underwriting and it is rejected? As a LSS Black Belt, my first question when this happens is, how did this happen? The truth is that with today’s regulatory environment, we may have to try new ways to underwrite loans. For instance, should a loan have a credit approval from underwriting before the appraisal is ordered? Should underwriter duties be bifurcated into credit, appraisal, income, etc. with a final overview by a senior person after everyone does their part? I believe these are questions we will be forced to sort out as the “old ways” don’t accomplish the goal anymore.
Until then, you need to have a second review protocol in place for loans that are rejected. At the very least, a senior review is in order to either correct the rejection or find out how it got that far.
Protocols should also be put in place to monitor conditions. Many underwriters, especially the newer ones, are scared to death that they are going to miss something, so they over-condition. Who looks at the files to make sure this isn’t happening on a disproportionate basis?
These platforms are a whole new world for lenders. Some lenders do it well and others have real issues in the treatment of consumers that enter the e-origination platform. If you’re going to do this type of originating, and I would submit that this will only grow in the future, then this type of origination must be monitored as stringently as others. Trust me when I say the Mystery Shoppers are testing these origination avenues as well!
What is communicated to the consumer before, during and after you ask them for information? Do you “require” information that you are not allowed to “require” in order to give consumers disclosure information? If you check your intake software, you may be surprised by two very important items. 1. How the system will not proceed if the consumer doesn’t provide certain information (remember, you can only “require” 6 items). 2. How the system responds once those 6 items are collected. So if you are catching my drift, then you know that the intake fields must be properly ordered to prevent these issues!
If you are using automated underwriting for your e-origination platform, do you do a second review on the fall outs to ensure that you have no way to serve the consumer? You cannot state in your policy that you only do loans that are AUS approved and then do “exceptions” to that policy without monitoring how those exceptions are being applied. As an example, let’s assume you use the e-origination platform to “filter” good loans. Guess what! If you offer e-originations, all consumers have to be treated the same. You can’t pick and choose who you want to call back, or correspond with.
Finally, if you are using e-origination platforms, who is minding the first and second reviews of the data input by the consumer? Consumers don’t always input the right information so a second review protocol is in order. The solution may be as simple as the originator assigned to the consumer, calls within a certain period of time and reviews the information with the client.
Monitoring and checking the treatment of all consumers is essential to prevent numerous issues. Be sure that you think through your origination avenues, place yourself in the position of the borrower and seek to educate the importance of the second review processes you develop. Come exam time you’ll thank yourself!
If you need assistance with Fair Lending Strategy or solid fair lending training, I’m just a phone call or email away! Many people tell you that you have an issue, we help you fix that issue!
This is incremental fair lending review #7 in our series. If you missed the first 6 quick hit tips you can find them on this blog.