Fifth Third Bank
Within predominately minority neighborhoods, subprime financing accounts for more than 50 percent of the mortgage lending activity. Separate HUD and Fannie Mae studies have found that many of these borrowers (up to 50 percent) would have qualified for prime or near-prime financing. This situation has generated a flurry of local lending regula
tions, and it has refocused attention on the impact of credit scoring on the availability of prime-rate products in certain markets.
The perceived negative impact of credit scoring is counterintuitive if the tool is used properly. The reduction in time and resources spent underwriting high-score applicants should expand resources to manually underwrite cases in which the borrower is a good risk but has no credit history or inaccurate information in the mortgage application. More importantly, credit scoring could also free resources to offer more labor-intensive complementary products that use a combination of credit training, rehabilitation and recent payment history to offer prime- or near-prime-rate products. Thus, the proper use of credit scoring should increase properly priced credit in all market segments.
This series of articles on the use and monitoring of credit-scoring-based origination programs reflects concern about the proper use of credit scores and about policies and processes that ensure this increasingly prevalent tool is used fairly. However, this focus on tactical compliance ignores the more important, proactive impact that a bank's strategic focus can have on fair lending and credit-policy adherence. Specifically, an organization's overall strategy establishes the vigor with which each market segment is pursued. A business strategy that requires "fair-share" penetration across all segments within the company's footprint aligns business line and compliance objectives and provides top-down pressure to ensure adherence to credit policy and aggressive outreach efforts. It also signals an institutional intolerance for fair-lending and credit-policy violations.
The illustration on page 6 provides a framework for discussing how strategic orientation and fair-lending compliance combine to generate more equitable results. The most important phase of the origination process is the establishment of a market focus and business goals. Business goals that include penetration targets and objectives for all market segments drive the marketing, advertising and outreach programs that bring prospects into the system. In the absence of such a program, a perfect fair-lending and credit policy still would generate an inequitable result. In addition, inclusive business goals authored by senior management signal to originators and underwriters that failure to observe policy equitably has consequences for performance reviews. This business line pressure to perform reinforces the compliance program and ultimately produces more equitable lending results and a stronger compliance program.
Fifth Third Bank's senior executives sponsor an aggressive Senior Diversity Strategy Initiative, which seeks to identify opportunities to increase share in each market segment within our footprint. In the context of fair lending and credit access, the initiative's most important function is to signal executive management's interest in serving every segment of our markets to line employees who are responsible for lending and assistance programs. This diversity initiative establishes benchmarks and business objectives, creating top-down pressure to aggressively capture all good credit risks and prospects requiring additional help.
The initiative complements our ongoing business process, which establishes aggressive business goals for each tract within our market area and holds management accountable for meeting these objectives. These goals include both volume and loan-default performance targets. As a result, our marketing program and outreach efforts are structured to reach areas of underperformance. This effort results in more than fair-share allocation of underwriting resources to underserved markets. The goals must be aggressive enough to make inequitable behavior expensive at the personal level.
Banks should invest in strong training and education programs to ensure that each individual involved in the lending process is proficient in his understanding of lending policy and the critical importance of equitable treatment. Each person should be aware of the tools available to our customers to improve credit scores. The program should include classroom instruction as well as follow-up training programs that include some self-study component. Participation in such training regimens should be mandatory, with a tracking mechanism to verify progress.
A secondary review process that compares similarly situated applicants provides the most effective and timely method to ensure that policy is followed and assistance is offered on a consistent basis. The secondary review process allows the bank to compare performance to policy, to spot patterns that may indicate a breakdown in the training regime or to identify opportunities to assist prospects in obtaining credit.
Banks should offer portfolio products that do not rely completely on the automated underwriting process. These products have proven profitable for bank and non-bank lenders. The more flexible process generally leads to a more complete discussion of credit factors. It often allows banks to capture business from individu-
TABLE 1: Strategic orientation + fair lending = more equitable results.
Prospective borrower engages lender, presents qualifications
Borrower discouraged, steered to others
Borrower applies for mortgage financing; underwriting process
Loan approved als who are good risks but, for one reason or another, are not identified in a purely automated process. A flexible product with stretch goals creates an environment in which all credit issues are thoroughly discussed.
Banks should, through their training programs, make certain that originators are well-trained in credit and its impact on the approval and pricing process, as well as the applicability of alternative products in the case of credit problems. The availability of products with different credit-score thresholds, in combination with strong training and aggressive goals, will invariably lead to a full discussion of credit issues.
An executive management commitment to each market segment and stretch goals for production and credit performance create an environment in which disparate treatment becomes personally expensive. The resulting performance pressures ensure that all applicants become critical to business line success and, thus, the recipients of all reasonable efforts.
Good intentions mean nothing without the right tools. An aggressive internal training program that includes diversity as well as credit and product components is critical to ensuring that our staffs have the requisite knowledge to deliver consistent service to all of our loan applicants. We track training participation and send reminders to personnel who fall behind in their training. To police actual performance, we conduct a second review of all denied mortgages for minority mortgage applicants. These second reviews are conducted weekly, and committee members include the mortgage business line manager and staff members from compliance and community affairs. In addition, a formal fair-lending audit is conducted at least twice each year. Fair Lending Wiz software includes a number of tools that allow us to spot patterns for further review.
A combination of senior management involvement, strategic focus and a sound compliance program are critical to generating equitable fair-lending results on a consistent basis. Unless business goals include volume from
underserved markets, the most perfect compliance system will generate meaningless results. The combination of strategic focus through our BLITZ program, an aggressive training program and compliance audits have allowed Fifth Third Bank to produce a number of impressive results. First, we boast a denial rate for African-American applicants in our home market that is 25 percent lower than the Home Mortgage Disclosure Act aggregate. Second, we have continued to meet our aggressive business growth targets in each of the past two years. Finally, we continue to boast superior credit performance within our peer group.
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