Many thanks to Robert Cook with Hudson Cook, who has developed this list, after working with many lenders on the legal issue of Fair Lending. These are his recommendations, with a few added comments from others.
- Scrub your HMDA data! It has to be accurate and the number one issue lenders face is that their data is wrong. Sometimes this can make you look like you have an issue when you really don’t. He warns that it is not wise to wait until you get a notice of exam to do this. CFPB has required many lenders to scrub their data and resubmit it; not to mention it may cause suspicion on the rest of your business. PS. You might want to check your LOS data while you’re at it. Although it is not as heavily Fair Lending related it does need to be accurate for the CFPB exam.
- Make sure your staff understands the HMDA codes. If you have a lot of “withdrawn” or “counter offer not accepted” you may have a big issue from either data integrity or overlays that cause Disparate Impact.
- HMDA data with a suspicious pattern of codes for government monitoring information. Lyn Farrell of Treliant Risk said to give it the “eyeball test”. Do you see a large percentage of minority applicants in an area where there are not large numbers of minorities? Are there a large percentage of “same sex” co-applicants with no reasonable explanation? While this might not be an issue when investigated, it will be questioned by an examiner; so you might want to find out these things before they look at your data so your responses are prepared. Or, change your data to reflect the correct information and resubmit it to HMDA.
- Not having a standalone Fair Lending Policy that is approved by the Board of Directors.
- Not having a policy on unfair, deceptive and abusive practices. Look at each of your profit centers and if they are not mortgages, then heavily evaluate your level of risk for that line of business.
- Not having good state to state research on when you can require a non-applicant spouse signature and when you cannot.
- Not having a good process for monitoring pricing discretion and underwriting discretion, to determine whether there are problematic differences by prohibited basis. When discretion is allowed, although it helps with competition, it must be monitored internally. Optimal Blue can help you with that. Ask me for more details.
- You have a good monitoring practice, but you take no action when you find something wrong. CFPB knows mistakes will be made; it is not addressing the problem and taking action that causes issues.
- Not monitoring your practices and programs for potential Disparate Impact. Any business practice that may cause Disparate Impact should be accompanied by a written business justification. Although the CFPB was asked for clarification, we are not sure yet what business justifications are being accepted.
- Regulate and manage your vendors and anyone sending you loans through your correspondent channel, to the level of degree you are regulated. You will be responsible for their loans as if your originated them yourself.