Lending Perspectives: With Credit Unions’ Mortgage Success Comes Responsibility

In 2006, I attended a roundtable in Las Vegas to discuss how credit unions could build market share in mortgages. At the time, credit unions had about 2% of the market nationwide. “Two to 10 in 10” was the rallying cry; 10% market share in 10 years. 

At the time, it seemed like a Big Hairy Audacious Goal for sure, yet credit unions have seen their market share hit 10% and settled in the 9% range the last several years. 

Credit unions have certainly been helped by the financial crisis, as more borrowers sought us out because we never participated in the pick-a-payment loan business or did anything else that created the mess in the housing market. We also have to give an assist to some of the big banks that have, for the most part, abandoned affordable housing and mortgages, preferring to make jumbo loans to wealthy customers with the promise of additional cross-sold products.

Yet with this market share comes profound responsibility, and a commitment to fair lending is without a doubt in my mind the biggest responsibility—and potential pitfall. Ask a lot of lenders about fair lending, and you’ll get this response: “We don’t discriminate; we want to make loans.” They believe that having strong policies prohibiting discrimination, paired with fairly routine and consistent training, are sufficient to ensure fair lending. Yet when it comes to fair lending, forgive the pun, it’s not that black and white. 

To understand any aspect of fair lending, you must understand the three different definitions of lending discrimination:

Overt discrimination. Seemingly the easiest to avoid, overt discrimination is directly related to a borrower’s protected class. Unless you have a policy that says, “We’ll turn down applicants based on their status as XXXXX,” and XXXXX is a protected class under the Equal Credit Opportunity Act, you should be okay. In addition, denying a loan and making that kind of statement in the underwriting notes would be a bad idea. Overt discrimination is pretty easy to spot.

Disparate treatment. An example of this type of discrimination might occur if you turn down similar qualified (or unqualified) borrowers, yet you treat them differently based on a prohibited basis.

Disparate impact. Basically, this may occur when you have a policy that is consistent and not discriminatory on the surface but has more of an impact on members of a specific protected class. This is perhaps the most difficult type of discrimination to prove.

This month, I’d like to reflect on the aspect of fair lending that can’t be quantified using Home Mortgage Disclosure Act data, called “level of assistance.” Simply put, the level of assistance that a credit union gives to any borrower in completing a loan application must be provided in a non-discriminatory way.

Level of assistance, which specifically addresses disparate treatment, has little to do with the loan decision. Level of assistance is not a FICO score, income or debt-to-income ratio. You can only test for level of assistance by taking a deep dive into the weeds of the loan—specifically, the documentation. You need to look at a large sample of denied and approved loans and check for a variety of actions your staff may or may not have taken. For example:

• A minority applicant has some past credit problems, and your staff has asked for a written explanation. Thirty days passed and without any type of follow up or second request for the information, the loan is denied. Yet you find another applicant, one who is not part of a protected class, who was also denied and had similar credit issues. However, your loan officer made several calls to request the information and ultimately received it, but the borrower was still denied.
• A single mother applied for a low-down, conventional mortgage and was denied due to excessive obligations. On the other hand, a single man applied for a similar mortgage and was denied but your loan officer, after consultation with your underwriter, suggested that he apply for a Federal Housing Administration loan due to more liberal back-end ratios.
• Another pair of borrowers, one not in a protected class and the other considered to be part of a protected class, are both denied for a loan due to excessive obligations. Yet the non-protected class borrower, after discussion with your loan officer, had his loan re-worked and submitted a consolidation loan request that would reduce his debt-to-income ratio. The other borrower, who may have benefitted from such consideration, was simply denied.

These are all great examples of what level of assistance is all about. No analysis of your HMDA data will find these examples. Level of assistance is about service, the culture of your organization, and the documentation of your loan files. 

Documenting level of assistance may come in very handy with your regulator or, in the case of a community or housing advocacy group that has taken note of some of your HMDA stats, in mitigating and explaining any perceived deficiencies in your data. Level of assistance should be—once you’ve gone past policy, procedures, training and the basic analysis of your data—the next step in ensuring fair lending.

Bill Vogeney is the self-professed lending geek and chief revenue officer of $5.6 billion Ent Credit Union, Colorado Springs.