Hopefully you have taken a look at the “cool tool” I posted on the discussion group and have identified areas that you lend in. When you stand back and take a look at your MSA do you see any obvious “holes”. The Fair Lending examiners call these “donut holes”. Essentially they look to see if your pattern of lending is mainly in the well-served areas and not in the underserved areas. If it seems obvious to you, then I will submit that it will be obvious to them as well.
So, now what do you do? Well it is time to start planning your defense and that starts with an action plan. An action plan tells the examiner several things:
- I potentially see an issue.
- I know it is important to address.
- Here is my plan to address it.
Doing nothing is not a good strategy. That makes examiners very testy! Building your action plan takes a little bit of time and a little bit of strategy. You do not need to call in ever expert known to man to get a jump on this. A little self-analysis followed by an attempt to try will go a long way.
Now that you know where you lend, it is time to identify some areas in your MSA that can produce similar objectives (good loans and profit) while at the same time not wasting your efforts. This is probably the most difficult part of your plan because it requires a bit of research. The census bureau site, real estate agents, and home-buying counseling offices can answer many of your questions about the average homebuyer in the underserved areas.
Once you know what the average homebuyer looks like in financial terms, you can compare that to your product line and underwriting criteria.
If either your product line or underwriting criteria have higher thresholds, based on the average client in the underserved area, you may want to consider changes to either of those, to engage that market.
For instance, let’s say that your minimum credit score is 720 and that the average credit score in an underserved part of your MSA is 700. Let’s also assume that you checked out other lenders that serve those areas, and for all intents and purposes you have similar product lines. Are you able to accommodate 700 credit score clients? Will it cause your company harm? If you are able to accommodate a lower credit score and not cause harm to your company, then you know you can enter those markets.
If you believe that doing so will cause harm to your company, then make sure you take the time and money to seek a business justification that involves your legal counsel. The reason is simple. The examiner will compare you to other lenders that are similar in nature. If they see that other lenders are able to do business in those areas without harm to their company, then you will be asked why you can’t. If your business justification does not satisfy them, you may have fair lending issues to deal with and those are costly issues!
So my goal with this series is to go through the steps of helping you evaluate your market for diversity, hopefully have you document your reasoning, and then help you formulate an action plan to accomplish your goals. The ideas I will be presenting to you are proven and have worked quite well for other lenders so stay tuned!