Why Haven’t Loan Officers Been Told These Facts?
Sex Education from the Consumer Financial Protection Bureau and HUD
President Biden’s executive order 13988 extends the applicability of sex discrimination to the LGBTQ community.
Last week, the Journal took a brief detour to explain the word discrimination. As the term applies to the Equal Credit Opportunity Act and The Fair Housing Act, discrimination has a more nuanced definition than discrimination in the common vernacular. Moreover, discrimination occurs in different ways. For instance, the term discriminatory effect describes a common and pernicious form of discrimination.
So how did the CFPB and HUD come to embrace the discriminatory effect doctrine and apply that to ECOA and FHA compliance?
The CFPB, as well as every other federal regulator, adopted the discriminatory effect doctrine from interagency guidance published almost 30 years ago. Beyond regulations, Federal Regulators have various tools to promulgate the law, one of those being compliance bulletins.
April 18, 2012, From the CFPB
“CFPB Compliance Bulletin 2012-04: In 1994, the Interagency Task Force on Fair Lending – which was composed of ten federal agencies, including the Department of Justice, each of the federal prudential agencies with regulatory authority over financial institutions, and the Federal Trade Commission – released the Policy Statement on Discrimination in Lending (“Policy Statement”). The Policy Statement notes that the courts have recognized the following methods of proving lending discrimination under the ECOA:
- Overt evidence of discrimination
- Evidence of disparate treatment
- Evidence of disparate impact
The CFPB, which did not yet exist at that time, concurs with the Policy Statement. In addition, the Bureau’s ECOA Examination Procedures, Mortgage Origination Examination Procedures, and Mortgage Servicing Examination Procedures also adopt and reference the Interagency Fair Lending Examination Procedures, including those designed to identify evidence of disparate impact.“
Enough background. What does the CFPB say about sex discrimination now? In March of last year, the CFPB responded to President Biden’s executive order 13988 with an Interpretive Rule of the ECOA.
March 09, 2021, From the CFPB
“Today, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule clarifying that the prohibition against sex discrimination under the Equal Credit Opportunity Act (ECOA) and Regulation B includes sexual orientation discrimination and gender identity discrimination. This prohibition also covers discrimination based on actual or perceived nonconformity with traditional sex- or gender-based stereotypes, and discrimination based on an applicant’s social or other associations.
In issuing this interpretive rule, we’re making it clear that lenders cannot discriminate based on sexual orientation or gender identity,” said CFPB Acting Director David Uejio. “The CFPB will ensure that consumers are protected against such discrimination and provided equal opportunities in credit.”
The CFPB is issuing today’s interpretive rule consistent with the Supreme Court’s Bostock decision and supported by many of the public comments received in response to the ECOA RFI (Request For Information – a technique used to solicit technical acumen from subject matter experts). The CFPB will review its publications and examination guidance documents and, if needed, update these and other materials to reflect this interpretive rule. And, where appropriate, the CFPB will take enforcement action under ECOA to hold financial institutions accountable for their actions that violate ECOA.”
If complaints against unintended discrimination sound unfair, the doctrine could be described as settled law. The US Supreme Court upheld the doctrine of discriminatory effect in June 2015. Note the excerpt below from SCOTUS blogger Amy Howe.
June 25, 2015, U.S. Supreme Court Ruling
The Court drew parallels between the Fair Housing Act and two other antidiscrimination statutes, Title VII of the Civil Rights Act of 1964 (employment) and the Age Discrimination in Employment Act. It reasoned that it had interpreted both of those laws as allowing causes of action based on disparate impact when the text of the laws refers “to the consequences of actions” – that is, their effect – and such an interpretation would be consistent with the purpose of the law. Moreover, just like Title VII and the ADEA, interpreting the FHA to allow disparate-impact claims is also consistent with its purpose: eliminating discriminatory housing practices.
The Federal Housing Finance Agency (the regulator that oversees the GSE’s and manages the conservatorship of FNMA and FHLMC) provides a good definition of disparate impact.
“When a neutral policy or practice disproportionately excludes or burdens certain persons or neighborhoods on a prohibited basis, the policy or practice is described as having a disparate impact.”
“The fact that a policy or practice creates a disparity on a prohibited basis is not alone proof of a violation. When a disparate impact is identified, the next step is to determine whether the policy or practice is necessary to achieve one or more substantial, legitimate, nondiscriminatory objectives.
Factors that may be relevant to the justification could include cost, profitability, or compliance with legal requirements, among others. Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by a legitimate nondiscriminatory objective, the policy or practice still may be found to be in violation of the Fair Housing Act if an alternative policy or practice could serve the legitimate nondiscriminatory interests by another practice with less discriminatory effect.
Evidence of discriminatory intent is not necessary to establish a violation based on disparate impact. Appropriate statistical analysis is usually necessary to evaluate whether a policy creates a disparity and may also be relevant in assessing justification and potential less discriminatory alternatives.”
Next week, the Journal unravels potential exposure to sex discrimination liability.
Proactively, what does this change in sex discrimination interpretation mean for compliance?
From: Amy Howe, Disparate-impact claims survive challenge: In Plain English, SCOTUS blog (Jun. 25, 2015, 12:21 PM), https://www.scotusblog.com/2015/06/disparate-impact-claims-survive-challenge-in-plain-english/
Behind the Scenes
The Taper Tantrum
Watch Those Refinances, No On and Off Switch for Rate Changes
Leveraging a Blue Ocean Strategy to Grow Your Business
To Explore Strange New Worlds, to Seek Out New Life and New Civilizations, to Boldly go Where no Person has Gone Before :).
Leveraging Adverse Actions and Unqualified Prospects
The stepping stones to financing. Credit scores. There is no denying the centrality of credit scores to improving mortgage options for your customer. While the exact calculus involved in credit scoring is a bit of a mystery, empirically, stakeholders have deduced certain activities that improve or detract from one’s credit scores.
Despite much of the hogwash that the CRA’s and other stakeholders have published, hard inquiries from credit card companies and new accounts have a huge and immediate impact on scores. Furthermore, the greater the age of the tradeline, the heavier the weighting. This approach to weighting the score means that credit cards must be in place well before the customer needs the score at application. Therefore, deliverable number one establishes revolving charge accounts.
The credit utilization ratio is also significant. The model measures outstanding loan balances relative to the available credit. For example, the customer has two credit cards with combined credit limits of $5,000. The current balances of the two cards total $4,000. That sucks. Big hit to the credit score courtesy of the credit utilization model.
There are also indications that the number of payments made on a line could impact the weighting. For example, suppose the applicant does not use the card and consequently does not make regular payments. In that case, the tradeline may have a lower weight on the credit score.
Where does that leave us in providing clear guidance to our farm team?
First, your team needs options. Present the “nice to haves” and “must-haves” in that order. For example:
1) Instruct the member to ask for increases to the revolving lines of credit. As a result, the member’s credit utilization ratio will improve by having higher credit limits.
2) If the applicant has few or no revolving charge accounts, consider suggesting they open additional revolving charge accounts. Specifically, the member should simultaneously open as many accounts as needed to reach a total of four open lines of credit. Then, make one or more charges on credit card 1 for the first week of the month. Then, use credit card 2 for the second week, the same thing, make at least one charge. Then use credit card 3 for the third week and make at least one charge. Lastly, you guessed it, use credit card 4 for the fourth week and repeat the cycle.
Members should not carry revolving debt past the end of the billing cycle. Instead, the member creates an automatic payment from a checking account to retire the statement balance at the end of every billing cycle. Set it and forget it. If the card issuer does not provide an option to set up automatic payments, show the customer how to set up notifications on a google calendar.
When the member gets within 60 days of application, suggest the applicant begin using a debit card instead of their revolving charge accounts. Switching to the debit card ensures that they will have no outstanding balances on the credit cards by the time they get to the application.
3) Pay the rent, utility bills, and any other recurring bills in the same manner.
4) It goes without saying, pay the bills as early as possible. However, if the applicant fails to manage timely payment for a year or two, you might want to consider cutting that prospect from the team. On the other hand, if there is hope for improvement (or lots of referrals), allow for flexibility. As part of the recruitment, have the member sign an agreement to abide by The Plan. This agreement includes meeting the project objectives within the schedule milestones.
5) Dispute derogatory credit. Have the applicant open a reinvestigation with the CRAs. Under the FCRA, recent case law holds that an item of information on a consumer’s credit report is inaccurate if it is either patently incorrect or is misleading in such a way, and to such an extent, that it can be expected to affect credit decisions adversely.
Furthermore, the court ruled that putting the burden on the consumer to evidence inaccuracies as a prerequisite for reinvestigation is not supported by the law. As long as the accuracy of some piece of information in the consumer’s file is disputed directly with a CRA, a consumer has fulfilled his duty to trigger the CRA’s reasonable reinvestigation obligation.
What does this mean? It probably means the CRAs better not mess around with consumer complaints of inaccuracies on their credit report. Therefore, one might consider that derogatory credit might be technically accurate yet misleading and, therefore, inaccurate and should be contested. Again, no harm in the consumer trying.
Advise the member to get a free credit report from each CRA. Then, begin a reinvestigation by describing every instance of derogatory credit as inaccurate.
For an interesting article on credit score management, see the NerdWallet article here: https://www.nerdwallet.com/article/finance/raise-credit-score-fast
If the applicant is credit invisible (credit score unavailable due to lack of credit) and has objections or concerns that restrict their ability to open revolving trade lines, begin laying the groundwork for a nontraditional credit report. See the FHA 40001. (II)(A)(5) guidance for Manual Underwriting Nontraditional Mortgage Credit Report (NTMCR) and the acceptable elements and structure of NTMCR. Remember that nontraditional credit reports are not an option if you can obtain a traditional credit report.
Next week the Journal unpacks the workflow diagram and rehab schedule.
Tip of the Week
The Measure of Success, Using KPI to Wow Stakeholders
Generally, stakeholders express their expectations and concerns in vague terms. While contract dates, cash to close, and the P&I payment are sometimes precise and well understood, those requirements hardly encompass everything indispensable to stakeholders.
Key Performance Indicators (KPIs) measure how closely your efforts track with stakeholder expectations. The term KPI may be used synonymously with the term Quality Requirement.
KPIs or Quality Requirements can provide a more objective means to manage stakeholder expectations. Leveraging KPIs enables you to objectively demonstrate that the loan manufacture is on track by achieving the stakeholders’ early and mid-stream goals. Additionally, quantified (measured in time or dollars) KPIs drive the stakeholders to recognize priorities and better articulate realistic objectives.
Your stakeholders will communicate ambiguous requirements to you. Such as “I need a fast approval,” “we need a lower payment,” “more communication from the MLO,” “better estimates,” or “as little cash to close as possible.”
Translating these vague requirements into well-understood stakeholder deliverables requires appropriate granularity and specificity. For example, “If I can limit the cash to close to less than $500, is that what you mean by low down payment?” “Mrs. Applicant, if I can return your phone call the same day before 6:00 PM, would that be responsive communication in your view?” Mr. Applicant, if the cash to close and payments are lower than those on the LE, is that what you mean by no surprises at closing?” “Mr. Real Estate Broker, if we conduct a first-time buyer class once a month for your company, is that what you mean by more support?”
The KPI is a mini-contract between stakeholders that provides the necessary clarity enabling stakeholders to gain a shared vision of success.
When possible, quantify (a numeric expression, e.g., ten days, by 5:00 PM ET, within $500, no more than 10%) as many KPIs as possible – ten at a minimum (see the list).
Keep in mind that the stakeholders’ perspective is critical in defining the success criteria. Develop quality requirements on all your loans. Developing KPIs takes a little effort. Some are obvious and common to most transactions. Don’t assume you know what is essential to the applicant or referral partner. ASK. Other Quality Requirements require skilled elicitation. You must uncover and develop what will ring their chimes.
The observable measures that the loan is going well are evidenced by achieving the quality requirements. Therefore, the more frequent and conspicuously the Quality Requirements are satisfied, the more constant is the sense that the loan progress is positive.
Not only must you achieve the ultimate objective, but your activities must also demonstrate progress towards specific goals. These mini-wins during the loan manufacture are essential to winning and maintaining stakeholders’ buy-in. Quality requirements must be unambiguous to all stakeholders. Success begets success. It is tough to win when you are always running to catch up.
Show the stakeholder you know what is essential to them in unambiguous language. Then, throughout the loan manufacture, validate the successes with the stakeholders using the KPIs.
Like the well-worn maxim, ” It’s not just what you say, it’s how you say it.” The same thing applies to outcomes. Metrics provide the specifics with which to validate stakeholder satisfaction. Not just the end result, but how we did along the way. Again, measure not just the outcomes but that they like the way we get there.
Determine KPIs for early, mid and downstream wins. Anytime you anticipate a deviation from a quality requirement, that becomes an opportunity to reset the stakeholder expectations. Every day mortgage KPIs include: The loan commitment deadline. • The appraisal deadline. • The closing documents to settlement on time. • The closing date. • The amount of cash to close. • The monthly payment. • Loan progress reports. • Return phone calls as agreed. • Privacy protection. • Promised deliverables (home buying aids). • Disclosures. • NO UGLY SURPRISES.