Are Your Written Lending Policies Keeping Pace with the Economic Environment?
The lending market is constantly evolving. After years of record-high mortgage volume, mortgage applications are down. Rising interest rates are increasing demand for riskier home loans. Many fear a recession is coming.
While a lot has changed, one thing hasn’t: the need to follow your financial institution’s written lending policies.
Lending policies and procedures exist for a reason. They ensure your FI is lending in a safe and sound manner. They also ensure your institution is following Fair Lending laws, offering consistent pricing and terms for similarly situated individuals. The stakes for Fair Lending are high, and no institution wants to find itself the subject of an investigation, enforcement action, or lawsuit.
What does that mean for your lending practices?
How to Keep Written Lending Policies Current
Make sure you are following these best practices to ensure your lending practices match your policies and that you are mitigating Fair Lending risk:
- Update policies as needed. Any changes to underwriting standards needs to be documented. Whether it’s adding a new program or adapting an old one, standards, policies and procedures must be documented. Written underwriting policy standards should have set minimum standard qualifiers like: Debt-to-Income (DTI), Loan-to-Values (LTV), and type of collateral. This translates well for Fair Lending risk management. Guidelines should be clear and include procedures for exceptions.
- Controls & monitoring. Written lending programs should include actively managed and monitored compliance controls, such as policies, procedures, monitoring, reporting, management participation, etc. to effectively manage the underlying Fair Lending risk.
Use of concrete requirements (e.g. exceptions, complaints, fee waivers) in policies that have a Fair Lending component reduces the chance for criticism of subjectivity and provides for consistent application in servicing and loss mitigation practices.
- Review policy language to make sure it remains appropriate. Take note any language that allows for subjectivity and discretion. While this flexibility can help loan officers nimbly meet consumer needs, it needs to be paired with a monitoring and tracking process that looks at lending both holistically and by market area.
- Review lending activity. In addition to monitoring controls, lending activity should also be tested and reported. This includes updating written Fair Lending program (i.e. policy, procedures, and process) as needed, monitoring and reviewing lending activity, and implementing testing and reporting. Data analytics is an important tool to determine if your FI is compliant with Fair Lending laws. It should include analysis by each branch, loan officer by product/delivery system (e.g. mortgage, small business, and retail).
- Track policy exceptions and complaints. Exceptions should be formally tracked, monitored, and trended to understand the type, reason, and frequency for granted underwriting exceptions. It’s important to proactively look for patterns.
- Pay attention to pricing. Lending policies should require the FI to monitor and track any fees waived during the lending cycle (e.g. application, servicing, collections etc.). Fee waivers are a pricing indicator in a Fair Lending program and need to be reviewed at the same frequency as rate exceptions.
- Assess access to credit. Make sure policies require regular reviews of marketing outreach, products offered, branch operations (including the services provided and the hours of operation), appraisal practices, application processing, approval requirements, pricing, loan conditions, evaluation of collateral, or any other policy or practice materially related to access to credit. Ensure that each of these processes, products, or services are provided equally to all communities served, paying attention to areas that are less affluent and whose residents identify as one of the prohibited basis groups. This will reduce the risk of redlining.
- Make sure staff is trained on your FI’s written lending programs. That training should be tailored to their jobs, whether its mortgage underwriting, small business lending, or other consumer loans.
When adjusting to changing conditions, it’s important that your FI’s lending program remain consistent and documented. Make sure any changes come from the top. They should be approved by the board, management or your institution's lending committee, documented, and shared with employees.
And don’t forget to monitor the impact of those changes on your Fair Lending risk.
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