Throw out Your Vague Loan Policies
Journal article by Penny Lunt; ABA Banking Journal, Vol. 86, 1994
Journal Article Excerpt
Throw out your vague loan policies by Penny Lunt If your loan policy looks like the one below, you'd better read on It's hard to imagine a bank having policies that blatantly discriminate against people on the grounds of race, gender, age, or other illegal bases. Yet an archaic, unclear, or unwritten loan policy--and the way it's carried out-- could have a different effect on different groups of people. And different effects--or "disparate impact"--is a red flag to regulators on the lookout for fair-lending violations. Some examples of inadvertently discriminatory policies are: having a minimum loan size; having a minimum property value; and charging more for small loans than for large ones. Any bank that hasn't dusted off its loan policies and reconsidered them in light of the Fair Housing Act, the Equal Credit Opportunity Act, and activities of bank regulators, the Justice Department, and the Department of Housing and Urban Development, should do so now, before it gets a visit from regulators or Justice. Following are some things to look for and perhaps change in a loan policy, suggested by compliance experts. Much of the comments make reference to "minorities" or "blacks," but they apply equally to discrimination by age, gender, religion, or other characteristics. Evaluate your lending patterns for disparate treatment and disparate impact, and determine if any disparity problems could be caused by your loan policies. Maurice Jourdain-Earl, managing director of Channel Link Capital Partners, says that if he were a banker, before looking at loan policies he would first conduct a self-evaluation. This would include a comparative file audit, an operations audit, and other loan analyses. "Once I'd gotten a report on what actually is taking place, then I would review practices vis-a-vis the policies to determine whether or not what has occurred is in compliance with what the policy has been," he says. "Then and only then could I determine what changes in the policy I need to make." Channel Link Capital Partners is based in Washington, D.C., and Oakland, Calif., and provides loan management and fair-lending services to mortgage lenders. "Let's say you did a comparative file audit and found that for one reason or another black files didn't have appraisals in them and white files did," says Michael Taliefero, also managing partner at Channel Link. "You'd work back to the policy or practice that's causing that." Don't be vague. "I believe that the old standard consumer credit policy, which leaves most of the underwriting decisions to the lending officer, is ripe for disparate treatment to occur, as well as for unsafe and unsound banking practices," Jay Huling, director of retail credit policy at Banc One Corp., Columbus, told bankers at ABA's National Retail Management Conference in April. "The type of policy I'm talking about generally fits on two sheets of paper. If your policy doesn't set out specific rules for loan officers to follow, you're guaranteed to have different treatment of different types of customers." Huling recommended that banks nail down where they draw the line on credit score cutoffs, loanto-value ratios, and other underwriting criteria, and leave little to interpretation by the loan officer. "Your problem with very undefined policies is of disparate treatment, because if a loan policy is undefined, two loan officers can be imposing the same loan policy quite differently," points out Blair Rugh, senior vice-president, compliance, for Kirchman Corp., the Orlando, Fla., software company. Take some, but not all, discretion away from loan officers. "One of the things for which Shawrout Mortgage Co. was criticized was the extent to which the underwriters had discretion in evaluating mortgage loans," pointed out Peter L. McCorkell, general counsel at Fair Isaac and Co., San Rafael, Calif., at the same ABA conference. "That's interesting because when you listen to regulators and community groups, discretion and flexibility are two of the things they say are desirable. I'm not sure that really is the case in the real world. Recently some of the regulators have been throwing up their hands and saying discretion sounds like a good thing, but every time we see it in practice somehow it's working for the white borrowers and not for the minority borrowers." Taliefero believes discretion needs to be limited on the front line to a large extent. "Typically people on the front line do not get sufficient training, and a lot of the positions in the loan officer area have high turnover," he says.He gives an example of a dangerous decision a loan officer can make. ... |
End of free preview...
To continue reading this publication, you must have a Questia Subscription.
Try Us Today! Click Here
Questia provides the world's largest online library of scholarly books and journal articles, with integrated footnote and bibliography tools, highlighting, note taking and book marking. With a Questia subscription, you'll have access to the full text of more than 67,000 books and 1.5 million articles.
Already a subscriber? Login:
Sponsored Links
Free Newsletter
Get helpful how-to's, writing tips, search strategies, quizzes & more!
Search the Library
