How lenders can clean up fair lending policies

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Apart from the obvious real estate loans, the mortgage industry is known for two things: acronyms and emerging trends. One trend that has been gaining traction lately is the renewed focus both inside and outside the mortgage industry on fair lending practices. One of the first enforcement actions signed in January, ordered the Department of Housing and Urban Development (HUD): “… to take the necessary steps based on this analysis to fully comply with the requirements of the Fair Housing Act.” In its continuation memo directly to HUDPresident Biden further outlined the level of priority that his administration will place on fair lending:

Accordingly, it is my administration’s policy that the federal government must work with communities to end discrimination in housing, provide redress for those who face discrimination in housing, eliminate racial bias and other forms of discrimination in all stages of home buying, and renting to remove barriers to housing and neighborhood choices, promote community diversity and inclusion, ensure an adequate supply of affordable housing, and ensure equal access to housing opportunities for all.

These directives, as well as other factors, have prompted lenders to review internal policies to ensure they have strong and reliable fair credit policy in place.

Spoiler alert: many don’t.

What is Fair Credit Policy?
Many lenders do not have strong and reliable fair credit policies because they don’t know how to create one. Many believe that having the Equal Housing Lender logo on their websites constitutes a fair lending policy, while others believe that they are simply in the business of providing loans to anyone who qualifies, and that their employees “never” knowingly or unintentionally will discriminate.

In short, a fair credit policy describes how a lender operates without discrimination. It should designate an employee with the requisite experience to be responsible for fair lending to the company, include training guidelines, outline a data analysis policy, and define reporting requirements to the board of directors and / or executive management. In addition, an honest lending policy should be readily available to employees at all times.

Fair Credit Officer
Fair lending is most often considered under the lender’s internal audit programs, provided that the lender has such a program. Increased efforts related to regulatory oversight and enforcement will certainly be accompanied by increased attention to fair lending policies, thereby increasing the role and responsibilities of the lending officer. A designated Fair Credit Officer should not be an overburdened employee with eight other positions because “someone has to do it”. In addition, the role of the Fair Credit Officer should be part of the official job description or position of the employee.

The Fair Lending Officer must have previous experience with Fair Lending and / or HMDA Compliance, and his / her current job responsibilities should include tasks related to Fair Lending. In addition to enforcing fair credit policies, the Fair Credit Officer is responsible for reporting fair credit. Reporting best practices include reporting to executive management or the board on a quarterly basis.

Who needs preparation?
Establishing and enforcing fair lending training procedures is an essential component of a company’s fair lending program. All employees must be trained within 30 days of hiring so that new employees know which working methods are acceptable and which are not; and training should be strengthened annually and updated as equitable lending policies change. If there is a board of directors, these members must also receive training.

Data tells a story
By properly analyzing the data, lenders gain valuable insight into their lending practices with regard to fair lending. Lenders looking for a strong and reliable fair credit policy need to perform data analysis not only to determine their credit profile, but also to gain a deeper insight into the story that the company’s data tells. Ultimately, lenders must ensure that borrowers with similar credit profiles receive similar credit decisions, rates, and conditions – regardless of race, gender, or any other protected category defined by existing fair credit laws.

For example, if a hypothetical group of approved male borrowers, non-Hispanic white males under the age of 62 has an average annual interest rate of 4%, and the average annual interest rate for approved male Asian borrowers under 62 is 6%, the data show you need to dig deeper. This does not necessarily mean that the lender is discriminating, but the discrepancy is something that the lender will definitely want to investigate to find an explanation. In the end, it is better to know and act than learn from the regulator and react. If the lender finds an explanation based on the loan, then fair credit policy is working. Otherwise, the lender should change its fair lending policy to avoid further discrepancies.

Fair Credit Fund
Simply put, lenders must make sure that they are doing everything in their power to comply with the Fair Housing Act and ensure fair lending by developing strong and reliable policies. Appointing a fair lending officer, ensuring regular reporting, training all employees, and performing detailed data analysis are not the only hallmarks of a vigorous credit fair policy, but they certainly set the stage for a very solid foundation.



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