ABA Bank Compliance - March/April 2017

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non-originated applications primarily present risk relative to the number and type of applications denied by a bank, withdrawn applications may also be an early risk indicator.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 morrisk@columbiabank.com.

Endnotes

1 Stepler, R. (2016, June 27). 5 key takeaways about views of race and inequality in America. Retrieved from Pew Research Center: http://www. pewresearch.org/fact-tank/2016/06/27/key-takeaways-race-and-inequality/