Review loan files and denials for adequate documentation. Look at all forms, documents and disclosures in the files.
Given the increased reliance on automated underwriting, what should lenders do to ensure that their lending policy is strictly observed and that any assistance offered to loan applicants or prospective applicants to improve their credit score is offered equitably? Lending policies must be observed to ensure sound financial business decisions and to avoid any potential disparate treatment of applicants.1 At the same time, policies must allow lenders to evaluate individual credit needs and varying applicant scenarios. Lenders must be conscious of nontraditional applicants for whom relaxed underwriting may be key in obtaining a loan. For example, Midwest BankCentre offers the FreddieMac Affordable Gold "97" mortgage product for first-time home buyers. This program, in contrast to many others, allows for a 3 percent down payment from any source (e.g., gifts).
How a mortgage credit decision is made is one of the two keys of potential discrimination. Prescreening is the other. Underwriting standards and policy adherence are very important. Allowing excessive overrides creates an atmosphere for potential discrimination— when a lender decides to override an established and proven underwriting decision, the reason is personal more times than not. Banks should have workable, clearly written policies and underwriting guidelines. Every lending decision should be fully and clearly documented, especially if a lender overrides a prescribed credit score and makes the loan. Lending institutions must give equal assistance to all applicants.
Given the increased reliance on automated underwriting, what should lenders do to ensure that applicants have a clear understanding of the importance of their credit score to the approval and pricing process? Generally speaking, the average mortgage applicant—especially the first-time home buyer—does not understand clearly how a credit score affects the mortgage outcome. Applicants who have never had a loan or a problem with a loan decision probably have never heard of a credit score. Knowing how to use a credit score involves knowing what is in the score and what it does and does not tell about the prospective applicant. Because the score is based on data provided by a credit bureau, applicants should be instructed on how to rectify any error or problem that appears on their credit bureau reports.
If a bank or creditor does not use a credit bureau service, then the applicant's credit history is not recorded. These scores do not reflect information such as the amount of down payment, income, cash flow or other mitigating assets. The score is only part of the applicant's credit picture. Therefore, one may conclude that too much reliance on credit scores or on automated decisions could raise flags of disparate impact issues.2 In actuality, there may be many reasons why a low score would not be a negative in the bank's decision. For example, a large down payment or significant cash flow could justify overriding a low score. We do make loans to applicants who may not have stellar credit—Freddie Mac guidelines allow for A— offerings—but the interest rates are usually higher.
Given the increased reliance on automated underwriting, what should lenders do to ensure that staff training and oversight regarding the credit policy and fair-lending guidelines are adequate to ensure consistent and fair treatment of loan applicants? First, all lenders in the bank should know the products offered and always explain to prospective applicants the loan product choices and their associated potential costs. We need to take our responsibility to customers seriously. We earn the trust of customers by how we treat them.
Lenders using their own instincts instead of a score have a different perspective on customer relationships. When looking at the overrides in credit scores, management should look at the decisions made and where and by whom (which branch/lender). Management should look at patterns and at loans that have gone bad and compare them with any initial credit score. Self-testing and self-analysis with an eye on patterns and trends related to any disparity are vital to the organization.
To ensure fair and equal treatment of all customers in the application of our credit policies, Midwest BankCentre's compliance department holds annual mandatory fair-lending and diversity awareness training seminars for staff. The sessions are intended to generate discussion about how well employees understand fair-lending laws and issues of cultural diversity in the workplace. We use a video titled True Colors, the ABC Prime Time Live telecast filmed on location in St. Louis, and each attendee receives the booklet Closing the Gap—A Guide to Equal Opportunity Lending, published by the Federal Reserve Bank of Boston. We have also used other videos from corVISION Media Inc.—in particular, Valuing Diversity at the Interpersonal Level. Participants complete and discuss a self-assessment checklist that underscores their own perceptions of understanding differences and adopting changes.
Being a community bank, we do not rely heavily on credit scoring; we still consider the individual borrower's overall credit reputation. Because we continue to have direct interaction with our applicants throughout the credit process, it is important that our mortgage lenders receive ongoing training in what constitutes fair and consistent treatment.
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