Beyond the obvious of lending money for real estate, the mortgage industry is known for two things: acronyms and evolving trends. One trend recently gaining traction is a renewed focus both within and beyond the mortgage industry on fair lending practices. One of President Joe Biden’s first
Accordingly, it is the policy of my Administration that the Federal Government shall work with communities to end housing discrimination, to provide redress to those who have experienced housing discrimination, to eliminate racial bias and other forms of discrimination in all stages of home-buying and renting, to lift barriers that restrict housing and neighborhood choice, to promote diverse and inclusive communities, to ensure sufficient physically accessible housing, and to secure equal access to housing opportunity for all.
These directives, as well as other factors, have led lenders to examine internal policies to ensure they have strong and robust
Spoiler alert: Many don’t.
What is a Fair Lending Policy?
Many lenders don’t have a strong and robust fair lending policy in place because they don’t know how to create one. Many suppose having the Equal Housing Lender logo on their website constitutes a fair lending policy while others believe they are simply in the business of making loans to anyone that qualifies and that their employees would “never” discriminate intentionally or unintentionally.
In short, a fair lending policy outlines how a lender operates without discrimination. It should designate an employee with requisite experience as the company’s fair lending officer, include training guidelines, outline data analysis policies and define board of directors and/or executive management reporting requirements. Additionally, the fair lending policy should be easily accessible by employees at all times.
Fair Lending Officer
Fair lending is most often addressed within the scope of a lender’s internal audit programs, assuming that the lender has one in place. Enhanced efforts related to regulatory supervision and enforcement will certainly accompany the increased focus on fair lending policies, thus elevating the role and responsibilities of a fair lending officer. The designated fair lending officer should not be the overloaded staff member with eight other titles because “someone has to do it.” Additionally, the fair lending officer role should be part of the employee’s official job description or title.
A fair lending officer should have previous experience with fair lending and/or HMDA compliance, and his/her current job responsibilities should include fair lending related tasks. In addition to ensuring the fair lending policies are being maintained, the fair lending officer is responsible for fair lending related reporting. Reporting best practices include quarterly reporting to either executive management or the board of directors.
Who Needs Training?
Outlining fair lending training procedures and ensuring they are implemented is a critical component of a company’s fair lending program. All employees should be trained within 30 days of hiring so that new hires know what practices are and are not acceptable; and training should be reinforced annually and updated as changes are made to the fair lending policy. If a board of directors is in place, those members should also receive training.
Data Tells a Story
With proper data analysis, lenders gain valuable insights into the actualities of their lending practices as it relates to fair lending. Lenders that want a strong and robust fair lending policy need to perform data analysis not only to determine their lending profile, but also for a deeper view into the story the company’s data is telling. At the end of the day, lenders must ensure that borrowers with similar credit profiles receive similar credit decisions, rates and terms — regardless of race, gender or any other protected classes outlined by existing fair lending laws.
For example, if the hypothetical group of white, male non-Hispanic approved borrowers under the age of 62 have an average APR of 4%, but the average APR for approved Asian-American, male borrowers under 62 was 6%, the data indicates a need to dig deeper. This doesn't necessarily mean a lender is discriminating, but the discrepancy is something that a lender would certainly want to investigate to determine an explanation. After all, it’s better to know and act rather than find out from a regulator and react. If the lender finds a credit-based explanation, then the fair lending policy is working. If not, the lender should modify its fair lending policies to ensure further discrepancies do not occur.
A Fair Lending Foundation
Simply put, lenders must ensure they are doing everything within their power to adhere to the Fair Housing Act and promote equity in lending by developing a strong and robust policy. Designating a fair lending officer, ensuring regular reporting, implementing training for all employees and performing detailed data analysis aren’t the only hallmarks of a vigorous fair lending policy, but they certainly provide the basis for a very strong foundation.
