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Underwriting Overlays That May Cause Fair Lending Issues!

There is no doubt that lenders are approaching loans cautiously.  Virtually any loan outside of the box is considered to be too high of a risk.  Yet when you evaluate your underwriting guidelines, are you unintentionally excluding regions of your MSA?  If so, you may have Fair Lending Issues.

Here are some examples to start the brainstorming process:

Seasonal Income:  Your underwriting guidelines forbid use of seasonal income, yet you originate in an agricultural county.

Public Assistance Income:  You notice that “foster income” is for a child that is 17 and you believe that at 18 this income will stop so you deny the loan.  Failure to verify the “grade” of the child versus the age, leads to verifiable income that you did not count.  Since you made the determination based on Public Assistance income without checking out the true length, you have a Fair Lending Violation.

Grants/Subsidies:  In many high-cost states like California, the state provides grants and subsidies to clients that have completed counseling and fall within median income guidelines.  Many lenders turn away from these loans or charge a big adjustment to do them.  Since many of these loans are in underserved areas, you are excluding a viable part of your market.  The secondary market will buy those loans, so you will have to justify why you do not offer those.

Maternity Income:  Bank of America learned the hard way on this one.  If a woman is on maternity leave and will be going back, you cannot discount the income.  You would think that with all the press about this everyone would know.  Yet, I still hear it periodically from lenders!

Disability Income:  Are your guidelines in line with the GSE or end investors?  Have you added any overlay around this income that is not in synch with the secondary market?  Woe to the lender who messes this up with a disabled veteran.  There are lots of young homebuyers in this category, and even though Veterans are not a “protected class”, failure to treat them well results in CFPB issues.

Calculation of Non-Tax Income:  Are you methods of “grossing up” in line with industry standards?  I’m still amazed by lenders in military base areas that don’t understand how to piece together military income.  I have had underwriters on the phone who say that they do not gross up any income because all income is taxable. (What?)

Non-Traditional Credit:  A credit report may be the “go to” item for loan underwriting, but if you aren’t a credit person and a third party can verify payment history, it still meets CFPB rules for a QM.

LGBT (Lesbian, Gay, Bisexual or Transgender):  Once again, the big lenders take the hit and teach the rest of us.  If you have a homosexual couple and you do not allow the non-working “spouse” (whether marriage is legally recognized in your state or not) to be on the loan…….Well, you know the rest, (I hope)!

It is prudent for every lender to really look at the areas they lend in.  I mean this statistically.  What does the average homebuyer look like in protected class areas?  What types of income, credit instruments and banking do they use?  If you do not know, reach out to the community groups or non-profits in those areas.  Trust me, they know their market.  If for some reason you still cannot eliminate some of your overlays, get prepared.  You will be asked for statistically relevant business justifications.  That is quite a bit of work but will be necessary, if your overlays exclude minority markets.

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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