By Tory Haggerty, President of Tuscan Club Consulting, an ICBM Associate Member
Fair lending issues seem common place in the news. They range anywhere from inconsistent pricing, to redlining, to marketing problems. I want to briefly touch on 8 areas that everyone should evaluate when reviewing your program. I have seen banks go through a full examination only to get hit hard by a major fair lending issue months later. How is that possible?
I’ve spent 6 years as a compliance examiner with the FDIC, so I want to share some insight from my firsthand experience on how to mitigate fair lending risk.
Marketing – This is where it all starts. Understandably, you want marketing tailored to your audience, but make sure to know your audience. One issue is who you are (and aren’t) marketing to. I once met a marketing team that was instructed to not send mailers to certain zip codes which, by coincidence, overlapped with minority areas. This practice is a red a flag. If you have large minority populations in your area, make sure marketing is tailored to them.
Applications – If you use internally developed applications, you run a higher risk of fair lending issues. The questions you ask can put you in hot water. The easiest solution is to use industry standard applications. You must also train staff on appropriate application etiquette. I once saw a complaint where a loan officer told a minority applicant, while taking an application, “I know how you people are with car loans.” That one complaint triggered an entire fair lending investigation. Don’t discourage anyone from applying, and don’t go the extra mile for one customer and not the next.
Underwriting – Inconsistency and discretion is your greatest risk. You can have discretion, but this opens the door for treating some applicants unfairly. I once examined an institution that had a home loan denial rate to African Americans that was twice as high as Caucasians. This triggered a two-week comparative file analysis. Luckily, we were able to prove the bank had consistent and sound underwriting practices and no discrimination was identified.
Pricing – Pricing sheets are a compliance officer’s best friend when they are used effectively. I’ve been to a bank where management gave consumer lenders a range of 10 to 18 percent to price loans and never tracked or analyzed pricing trends. I found 700 basis point average difference between men and women. Have solid pricing guidelines, minimize deviations, and track and analyze for trends when you do.
Steering – When you direct a customer to a certain loan product it’s called steering, and this can be a good thing. When loan officers direct customers to higher fee and costly products to maximize income and higher fee and costly products to maximize income and profits, that steering can become illegal. Truly keeping customers best interest in mind is an easy way to minimize this issue.
Redlining – Whenever you exclude a certain geographical area from marketing or lending, you may be redlining. Penetrate all of your market area and keep a list of all the advertising mailers you send out to show regulators. If you are branching out, make sure you understand the areas. Make sure you are not avoiding low- and moderate-income census tracts and high minority areas.
Exceptions – Any deviations to your loan guidelines should be tracked and analyzed. I can’t tell you how many banks I’ve visited that track exceptions and never look at them again. Simply tracking exceptions is not good enough. You must analyze them for unfavorable trends.
Complaints – Any fair lending related complaint should be investigated fully. Look at everything from how the customer was treated to how the complaint relates to your program and the other areas I just discussed. Complaints are often the reason that banks get a clean bill of health, only to get hit with fair lending issues 6 months later. They draw regulators back in to do a full investigation.
Contact Tory Haggerty by email or at (605) 651-3877.