Bankers have struggled for years to find the right mix of loan products, loan originators and coverage within their assessment area in order to get a satisfactory rating from their regulators during a fair lending exam. For mortgage bankers, they are about 20-30 years behind in understanding how their lending footprint affects their fair lending exam, because this has not been on their radar until the CFPB put it there. In fact, if you ask some mortgage bankers you will find that few of them have even looked at this issue; let alone have a strategy or plan of action.
Mortgage bankers are being evaluated for Redlining based on the area that they serve. This leaves a lender wondering what that means. After all, if your company chooses to serve really nice areas with really nice loans, or areas where you recruited the best producers, then isn’t that the area that you serve? Well, not according to our regulators. Mortgage lenders are being scrutinized for the exclusion of certain areas within their market; also known as their MSA (Metropolitan Statistical Area). So what is a mortgage lender to do?
Quite frankly, this is why I started Fair Lending Diversity, which helps lenders build solid Fair Lending Strategy. Many of my clients at Optimal Blue saw diversity issues in their data, and when they asked who could help them fix it, we couldn’t find any strategists. We found a lot of people that can tell them they have an issue, but no one with the cure. Because of my unique background, strong familiarity with these markets, understanding of the partners that you need and the internal changes you may need to make; this knowledge allowed me to create viable and profitable solutions for lenders.
One of the first steps in building a strategy with a lender, is to take a look at where they are lending. I call this an MSA Diversity Analysis. After all, if you don’t know where your business is located in the MSA, then how would you know if your business is diverse or serving the under-served markets properly? This analysis allows a lender to visually see the obvious holes in the lending that they do in their MSAs, which a spreadsheet just cannot accomplish. Each and every census tract in that MSA is reviewed for production and racial distribution. This should be one of many steps in any lender’s fair lending due diligence and strategy development. It is so much better for your company if you demonstrate this due diligence, versus waiting on an examiner to surprise you with what they found.
Let’s look at two lender scenarios. Both lenders received notice from their regulator that they will be visiting the company for an ECOA Baseline Review.
Lender Number One:
The first lender looked at their MSA months ago and determined that there were certain areas within their MSA where they didn’t have production. Understanding that this may cause issues with the regulatory bodies, they addressed it immediately and performed a MSA Diversity Analysis. From this project they also noticed that contained within low production areas, were higher pockets of minorities, and that most of their loans were in very well-served markets with relatively low minority populations. This was the catalyst for coming up with a viable action plan & strategy to correct this pattern, and demonstrate that they were not Redlining. The examiners arrived, saw the detail with which they evaluated their area, reviewed their monitoring and action plan, and decided to give that lender a reasonable period of time to correct the issue. This meant that the examiners left sooner than they expected, and gave the lender time to demonstrate diversity in lending within their MSA. It doesn’t mean the examiners will not revisit, but it does mean the lender took Redlining seriously, provided due diligence to the examiner and showed they were trying to move in the right direction.
Lender Number Two:
The second lender saw no issue with originating where they wanted to originate. After all, in their opinion, this freedom to choose is why they are mortgage bankers and not bankers. It’s their company and they can lend where they want to! Not being familiar with the intensity of a CFPB ECOA baseline exam or Redlining issues, they did little to prepare for the exam. Their business justification to the examiner for the holes in their footprint were, “we don’t lend in those areas because the loan amounts are too low and therefore we cannot make a profit”. They further justified their lack of lending in under-served markets by suggesting that these areas affect their FHA compare ratios, but provided no empirical data to the examiners. So the examiner took a look at their loan data and compared it to their peers in the market. Surprisingly, their peers were able to do business in those markets without issues, so why couldn’t they? The examiners decided to stay a bit longer and dig a little deeper into other fair lending deficiencies of the lender. Somebody better get the attorney on the phone!
Moral to the Story: Due diligence, preparation, market knowledge, strategy and plans of action complete your Fair Lending story so much better than a hypothesis built only on reasons versus real data to back up those reasons. So while Lender Number One spent a little bit more time and money to create the action plan, they spent less on attorneys, staff time and disruption to their business.
Bonus Moral to the Story: Lender Number One figured out through great strategy that they were losing money in the origination process; which when corrected, more than made up for the cost to perform their due diligence, and expand into the under-served markets. More on that one in later articles!