Underwriting and Non-Origination
As noted above, problems are created when underwriting standards are described to potential clients differently. This may not be
directly identified from a redlining analysis, but the analysis could
indicate the need to assess this type of disparate treatment. This
might lead to the next logical step of determining if underwriting
standards are applied to applications consistently. Searching for
anomalies in underwriting and any potential correlation between
those anomalies and demographic data is a good place to start.
Consumer complaints are also a good source of information relative to consistency in underwriting. If a customer asserts that
discrimination was a factor in a credit decision, compare the
parameters used to evaluate their particular application to the
written underwriting standards of the department. Ensure that
any credit mitigation activities intended to assist consumers in
qualifying for a loan are offered to applicants consistently.
In addition to this qualitative analysis, a quantitative analysis of
denial rates is also a prudent strategy. Compare the rate that white
applicants are denied to the rate at which minority applicants are
denied at your institution. Further, these denial rates should also be
compared to peer institutions. If your bank is more likely than peer
banks to turn down minority applicants, you’ll need to determine
if there is a legitimate reason for the disparity? To mitigate risk of
disparate treatment during underwriting, consider implementation of an Automated Underwriting System or other safeguards
to minimize the potential impact of individual discretion.
While non-originated applications primarily present risk relative to the number and type of applications denied by a bank,
withdrawn applications may also be an early risk indicator. If
minority applicants appear to be withdrawing applications from
your institution at a higher rate than white applicants, this could
indicate discouragement or disparate treatment during the application process.
Pricing and Fees
Having looked at where applications are coming from and how
many are originated, it is then important to understand if the
applications that are originated present risk related to the manner in which they are priced. A comparison of interest rates for
originated loans to white borrowers and minority borrowers is the
basis of this analysis, but does not constitute a complete review.
Further, fees paid in connection with loan applications or during the servicing of loans should undergo a similar comparative
scrutiny. Were fees charged by the bank assessed fairly to different
demographic populations? Is there any indication that minority
applicants were steered toward products with a higher fee structure
than other available products?
In addition to looking at interest rates and fees, the frequency
with which a reportable rate spread is present for minority and
non-minority borrowers is also important. How often do white
borrowers have a rate spread on their loan, indicating it’s designa-
tion as a higher-priced mortgage loan, as compared to members
of a minority group? While a rate spread review is not fundamen-
tally different from the interest rate comparison, it will allow for
an examination of your institution’s incidence of rate spread as
compared to peers. Publicly available loan data from peers does
not generally include specific interest rates provided to customers,
but does include reporting of rate spread.
The analysis of pricing and fees should be conducted at both the
portfolio level and the individual loan level where possible. Of course,
don’t forget to compare average interest rates provided to white and
minority applicants throughout the mortgage portfolio, and com-
plete the pricing picture by engaging in the traditional matched-pair
testing of similarly situated borrowers with different demographics.
A worst case scenario for a potential redlining case unfolds like
a story from long ago, in a time when discrimination was much
more common than it is today: A financial institution positions
branches and advertising in areas without high concentrations of
minorities, then handles those minority inquiries they receive in
a manner that discourages application. Of the applications that
are received, those from minority applicants are turned down at
a higher rate than their white counterparts. And finally, those
minority applications that are approved come with higher rates
and fees. Except this isn’t a story, and it isn’t from long ago; this
is a description of an actual enforcement action issued by the
Bureau in 2016. For an added dynamic, remember that redlining
concerns may relate to any prohibited basis group. This article
focused on redlining from a racial minority perspective, but it
could be adapted for age, national origin, or other prohibited bases.
As we go forward in training our loan officers, we must be
sure to tell them what can and does go wrong in our industry.
We need to stress that they are responsible to treat all customers
equally in every interaction. The potential for discrimination is
very real, and together we must all prevent it. ■
ABOUT THE AUTHOR
KATHRYN MORRIS, CRCM is a Vice President and Compliance
Manager at Columbia State Bank near Portland, Oregon. She serves
on the Oregon Bankers Association Compliance Officer’s Committee,
and has been a compliance professional for more than eight years.
Kathryn can be reached at email@example.com.
1 Stepler, R. (2016, June 27). 5 key takeaways about views of race and
inequality in America. Retrieved from Pew Research Center: http://www.
2 Bayer, P., Ferreira, F., & Ross, S. L. (2016). What Drives Racial and Ethnic
Differences in High Cost Mortgages? The Role of High Risk Lenders.
National Bureau of Economic Research.
3 Federal Reserve System. (2016, October 4). 2016 Interagency Fair Lending
Hot Topics. Outlook Live Webinar.
Consumer complaints are also a
good source of information relative to
consistency in underwriting.