The CFPB issued their 2016 Fair Lending Report on April 14, 2017. The report highlights the Fair Lending Enforcement actions from 2016 and identifies priorities for 2017.
Mentioned immediately was “Mortgage Lending is a Key Priority” and “focused in particular on redlining risk, evaluating whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.”
Although Redlining is not new, it is a fairly new concept to mortgage lenders who are non-financial institutions. Banks have regular fair lending exams from their prudential regulators, and although they have become accustomed to these exams, they have reported to me that the exams are getting tougher and as a result, we are contracted to improve their fair lending strategies!
For mortgage bankers, many are scrambling to figure out what to do about redlining and how to approach the solution. Redlining accusations are of particular concern to mortgage bankers because few considered where they were lending and focused mainly on well-served markets.
Although Fair Lending Diversity works on all Fair Lending issues, our consulting practice has seen a huge uptick in Redlining requests, because we are known for developing strategies that work and are profitable. I’ve written about this extensively on our blog at www.fairlendingdiversity.com Many people can tell you that you have an issue. Few know how to fix it and fix it well. Redlining correction is where we excel!
One of the biggest mistakes I see lenders make is believing that redlining cures are as easy to solve as hiring people and doing marketing in under-served markets. This is NOT a strategy and will likely backfire on your fair lending results. Mortgage lenders are accustomed to entering markets this way, but the techniques of entering underserved markets are very different! Strategy, then implementation is your greatest ally.
In fact, each task that you take on in Redlining Remediation Efforts needs to be assessed. I’ve been fortunate to work with 2 of the top 10 lenders on this issue. Their diversity in lending across their MSA’s is soaring, while at the same time maintaining their profitability goals and loan quality goals. They are surprised that diverse lending patterns can be just as profitable as their old patterns, and cure their Fair Lending woes!
I was ecstatic to see that one statement made in this report, and that is “Examination teams typically assess redlining risk, at the initial phase, at the Metropolitan Statistical Area (MSA) level for each supervised entity, and consider the unique characteristics of each MSA (population demographics, etc.).” As mortgage lenders we suspected this, I confirmed it verbally with personnel at the CFPB, and I am so happy it is now in writing!
Following are the factors considered by the CFPB:
“The Bureau considers various factors, as appropriate, in assessing redlining risk in its supervisory activity. These factors and the scoping process are described in detail in the Interagency Fair Lending Examination Procedures.
These factors generally include (but are not limited to):
- Strength of an institution’s CMS, including underwriting guidelines and policies;
- Unique attributes of relevant geographic areas (population demographics, credit profiles, housing market);
- Lending patterns (applications and originations, with and without purchased loans);
- Peer and market comparisons;
- Physical presence (full service branches, ATM-only branches, brokers, correspondents, loan production offices), including consideration of services offered;
- Community Reinvestment Act (CRA) assessment area and market area more generally;
- An institution’s lending policies and procedures record;
- Additional evidence (whistleblower tips, loan officer diversity, testing evidence, comparative file reviews); and
- An institution’s explanations for apparent differences in treatment.”
The final item to consider strongly is the effect of the new HMDA data on Redlining evaluation. I have written a white paper on this subject and done several speaking engagements about this topic. The bottom line is this. The New HMDA data will make lenders who are not diverse in their lending patterns stick out like a sore thumb! As you can see by the next statement from the report, HMDA data is one of the scoping techniques used, and with twice the data fields, many of which are pricing you can imagine how that may change the results of your redlining diagnostics.
“The fair lending prioritization process incorporates a number of additional factors as well, including; consumer complaints; tips and leads from advocacy groups, whistleblowers, and government agencies; supervisory and enforcement history; and results from analysis of HMDA and other data.”
If your company is concerned about Redlining, or other fair lending issues, we are just a phone call or email away. Call us to discuss your concerns!