In Part One of this series, I introduced you to the issue of Reverse Redlining. If you missed that, you can find it on this blog.
Today is the final article in this series and outlines a couple of glaring examples of what to watch out for in your own business practices!
If one of these examples look like your practice, you may want to formulate a better marketing strategy.
Hire Originators Who Are a Minority in a Minority Market
Lenders hear about all of the issues in fair lending and many are fairly new to this sort of regulation. The first reaction I hear is “Let’s hire originators in that market”. If you do that, I question whether this is a triggered reaction or an actual strategy. Almost 100% of the time it is a triggered reaction because this is what lenders have always done when they entered new markets. In a new market, lenders recruit, market and repeat. This rarely works well in underserved markets and can really mess up your Fair Lending Statistics if done poorly. Ultimately, this strategy will end up hurting your company more than helping it, which is why you must enter underserved areas strategically!
Let’s say you are aggressively recruiting in the underserved areas of your MSA because you know your company does not have enough production in those areas. You find someone in that area that is a top producer. However, they know they are a top producer and believe that the value they provide your company demands a higher commission than other originators. You offer them a brand spankin’ new branch and pat yourself on the back for picking up production in an underserved area of the MSA.
Before you do that, consider this. If you are a lender that still varies the end price/cost to the consumer based on the originator compensation plan, then you have two problems. First, having varying pricing schemes to a consumer, within a branch or MSA, because one loan originator makes more than another is not okay. That is going to get you, trust me! You can pay an originator more, but it cannot result in pricing disparity to the consumers! Second, if you pay that originator or that branch more in an underserved market and this is reflective in your pricing (meaning I have to pay them more so the rates/costs are higher), then compared to the rest of your book of business you are likely showing higher interest rates to minority borrowers; and that is going to require a whole lot of empirical data that you likely do not have in place.
I Am a Minority Owned Lender
That is fantastic! Personally, I’m very happy to see minority-owned lenders assisting those areas that are nearest and dearest to their heart. Yet if this seems like your company, you may also have two issues. First, take a look at your marketing budget. Is single-minority marketing where the majority of your marketing is done? If the answer is “yes”, then you may need to rethink your company strategy. I’ve seen a couple of high-profile lenders in this boat recently and through social media, they are just providing more and more evidence to the examiner for reverse redlining allegations. These practices are no more acceptable than a lender who primarily focuses on non-minority lending. They cannot do that and must exhibit diverse lending practices, and the same is expected of your company. Lenders, unlike real estate agents, are expected to show diverse lending patterns, which includes all areas of your market, not just some areas of your market.
The second issue is that some minority-owned lenders take this opportunity to charge higher rates or closing costs. I’ve heard justifications such as “the loans cost more to do in this market”, or “the loan amounts are lower so we don’t make as much”. Nice thoughts, but unless you have a ream of empirical data to back up this assertion you will likely have an issue and here is why.
You will be compared to what your peers charge in that market. So let’s say that your peers consistently charge a .50% lower in rate for similarly situated clients and $250 less in fees, on a consistent basis. Guess what? You charge higher rates and costs to minority borrowers compared to your peers! So if your pricing margins are not similar to your peers, then it appears that you are seizing the opportunity to make more money on the minority markets; and thus harming the consumer by charging higher rates and fees than what would be customary. When was the last time you did a peer analysis for pricing disparity?
Fair lending is full of land mines for lenders who are new to this world. Careful strategy and ongoing analysis is the only thing that will keep your company off of the radar screen for the regulators. Consumer advocacy groups, industry informants (i.e. your competition and yes, even your employees) or consumer complaints all elevate your risk and increase your chances for an exam no matter what size lender you are!
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