In the second installment of this two-part post, we provide some guidance concerning data for fair lending underwriting analysis in the community bank space.
Part 1 of this post briefly highlighted some of the challenges in analyzing loan decision outcomes with respect to fair lending. We made the point that underwriting of loans for community banks does not always fit neatly in a box. Loan decisioning, therefore, can be somewhat complex. This, in turn, creates issues with quantifying and, therefore, with collecting and monitoring pertinent data to account for loan underwriting outcomes.
Here are some basics that will help get an institution going in the right direction in terms of managing underwriting fair lending risk and data:
1) Understand the Underwriting Process
Most lenders underwrite loans in stages. It is important to know how the process works and what the requirements are at each stage. It is also critical to recognize how these vary by product.
2) Understand the Criteria Used in Credit Underwriting
In order to collect and maintain data for analysis, it is important to understand and quantify credit underwriting requirements. It is useful to think of these in categories, such as primary and secondary criteria, mitigating factors and special case situations.
3) Don’t Neglect Customer Relationships
Underwriting of loans in the community bank environment is often highly relational, especially in smaller markets. Hence, the applicant’s credit risk profile is often quantified by the bank’s loan experience with the customer or lack thereof. This is more than likely the case with all institutions; and, therefore, this must be defined in order to measure this critical attribute.
If an institution can manage to accomplish the three goals above with the end result being a well-defined process, data collection and fair lending testing then becomes possible. This may sound like an over simplification, but any bank that has gone through the process to quantify the three points above understands it is not an easy task.
Whether your institution takes this exact approach or not, it will always remain difficult to analyze loan decisioning practices without a way to adequately get your arms around the process.
Once this is done, however, the key data points can be collected and accurate monitoring of underwriting practices can be accomplished.