Ben Giumarra

Industry insiders are speculating that regulators will increase scrutiny of loan servicing departments while investigating fair lending requirements. If that’s true, will your institution be ready?

Ask an employee in your loan servicing area to explain how fair lending regulations apply to them. In many cases all you’re going to get in response is an exasperated look as if to say, “You do realize it’s fair lending, and that this is servicing, right?” But fair lending absolutely applies to servicing activity. And in fact, a betting man might just bet that this might just come up in your next compliance examination. (And another day we can have a similar discussion with the marketing department and branch personnel – both of which also sometimes seem to believe that only mortgage departments have to bother with fair lending compliance).

Fair Lending In General

Some compliance officers may struggle to convey the seriousness of fair lending compliance; “nobody here would ever discriminate against someone” is a popular retort.

Personal opinions aside, staff should look at it from the perspective of a suspicious regulator. For example, Massachusetts Community & Banking Council’s most recent report on mortgage lending and discriminatory patterns, published Dec. 20, 2016, entitled “Mortgage Lending to Traditionally Underserved Borrowers & Neighborhoods in Boston, Greater Boston and Massachusetts” shows that, at a minimum, the effects of discriminatory lending and real estate policies are still being felt. Meaning that fair lending regulations are still important. In fact, it’s not unreasonable to take the finding further and determine that there is still discriminatory bias in the lending and real estate industries. (Again, our personal opinions – mine and yours – are irrelevant.)

Here are some key findings from that report:

18 percent of African American applicants were denied a mortgage in 2015 in Massachusetts, compared to 5 percent of white applicants.

Not a single home loan was made to an African American or Latino buyer in 2015 in 86 out of 351 Massachusetts’ cities and towns.

Total home purchase lending to minority groups remains highly concentrated in a small number of neighborhoods. For example, Brockton alone accounted for 17 percent of all loans to African Americans in Massachusetts in 2015, despite only representing 1.3 percent of total loans in the state.

African-American households represent a 21 percent market share in Boston, but receive only 2 percent of FHA loans and 4 percent of non-FHA loans.

Imagine you’re a suspicious regulator responsible for fair lending enforcement. Imagine you review the statistics from this report before starting an examination at a Massachusetts financial institution. You see how a regulator might conclude that fair lending issues are far from behind us?

So whether you personally believe so or not, you can see how a suspicious regulator could reasonably conclude that fair lending regulations are still important to enforce.

Discrimination In Servicing

Understanding that fair lending is still a concern for every institution, we can intelligently talk about the risks in loan servicing.

What are the odds that all these issues exist with mortgage origination (which gets more attention and where statistics make it easier to bring issues out) but nothing’s happening on the back-end in servicing? Just like statistics show that African Americans are denied at a rate of 18 percent compared to 5 percent for white applicants, what would the statistics look like in loan servicing? Who receives late payment forgiveness? Who receives loan modifications? Who is offered and/or receives other loss mitigation options?

Is there a chance that a regulator would find discriminatory trends in your data? Even if it was accidental, or just not documented well enough? Think about other areas of loan servicing where there is discretion. (Discretion, of course, being a bad word in fair lending circles.)

So some of you are now quick to respond: “Ben, even if you’re right (which you’re not) that a suspicious regulator might actually find some fair lending concerns in my servicing area, I’ve been through plenty of exams and this never came up as a problem. So they must not be looking at this at all.”

Good point. I’m glad you brought it up. I agree that we’ve never had (past tense) much fair lending scrutiny in loan servicing. But I believe that the times, they are a-changing. Here’s why I think that.

We know that the Consumer Financial Protection Bureau acts a trendsetter for other regulators. Its annual fair lending report, published April, states servicing as a priority: “Going forward, because of emerging fair lending risks in other areas, we are increasing our focus on redlining, mortgage and student loan servicing, and small business lending.” The CFPB has also updated its ECOA examination procedures to hone in on loan servicing. It now includes instructions to investigate fair lending training provided to servicing staff, fair lending controls and monitoring in place in servicing, and whether any servicing options are provided to borrowers with limited English proficiency.

So combine that with recent anecdotal evidence of fair lending being raised in examinations, and you can see why I’m predicting this to be an emerging issue.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@SCAPartnering.com or (781) 356-2772.