Could redlining in mortgage lending still exist? According to CFPB and the Department of Justice, it sure does, and they are out to do something about it (Redlining).
The CFPB and DOJ are putting out the word to all mortgage lenders that they believe redlining definitely still exists and that they are working closely together to identify and correct any discrimination in lending. If a lender has a problem in this area with the CFPB, rest assured they will hear from the DOJ as well.
With the tightening of credit and more stringent underwriting guidelines resulting from the effects of the great recession and the Dodd-Frank QM/ATR rules, many lenders are more cautious when lending to marginal buyers.
These consumers may be those of low to moderate incomes attempting to buy in areas more suited to first-time homebuyers. Homes in these areas are normally priced at the lower end of the scale. So, it may end up that lenders are doing less lending in these areas. That may be viewed as redlining.
To identify potential redlining, the CFPB and DOJ will compare lenders in a peer group to determine lending patterns in the same markets. If the bulk of lenders are making loans in a market, then their belief is that all lenders should be lending in that market. What’s good for the goose, should be good for the gander.
Lending products for buyers in markets of lesser priced homes lean more toward those allowing a lower down payment, including FHA-insured loans.
Some independent mortgage lenders and banks, being more conservative in their lending preferences, may shy away from offering these products. If other lenders in their peer group are successful in these offerings in the same markets, it could pose a problem for the lender choosing not to offer them. This is especially true if that lender is lending in the same market but only to those with a larger down payment. It all depends at how CFPB and DOJ view it.
This regulator tag team is exactly what lenders feared from the outset of the QM/ATR requirements. In adhering to these rules, lenders fear they may be denying marginal loans at a higher rate, or not taking loan applications from marginal buyers that would not qualify under the new rules.
The ATR law is not yet tested so lenders are fearful of what could happen if these loans were made and subsequently defaulted. Memories of recent repurchase and indemnifications are still all too fresh in their minds.
This is a not so subtle way to force lenders to make more loans to riskier buyers in marginal markets. Have the lending industry take the increased risk to help make things look better in housing and the economy. Then, when the spit hits the span, blame the lenders for any problems. I believe we saw this movie recently, and unfortunately we know how it ends; with the lenders left holding the bag.
As protection, lenders need systems in place to monitor their lending activities, with a product and pricing engine that can identify potential fair lending or redlining violations.
In addition, a careful review should be done on all cancelled, denied and withdrawn loans to determine any potential redlining or fair housing violations. Be sure to carefully document these files to clearly identify the reason(s) for the termination of the loan application.
Application withdrawals should include a letter from the applicant explaining their reason(s) for the withdrawal. Be concise and be complete. It may save you later in a fair lending or redlining audit.
It goes without saying that lenders need to have fair and uniform lending and underwriting practices for all borrowers and for all products offered in the markets in which they lend. Lenders may not exclude a specific area from their offering strictly because of the area, type of buyer in that market, or location. If a lender decides to lend in an area, then its offerings need to be available to all buyers in that market, at the same pricing structures, rates, terms and underwriting criteria.
Watch out for how such criteria may be potentially viewed for creating a disparate impact against any group, class and/or type of home buyers. If you’re not sure, have your products and lending policies and practices reviewed by counsel. An ounce of prevention is worth a pound of cure.
Big Brother is watching…