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By Premier Insights

In Fair Lending

Posted March 01, 2019

No Recipe May be a Recipe for Disaster

No Recipe May be a Recipe for Disaster

As a New Orleans native, we are very proud of our cooking and food – and, for good reason. My grandmother had to be one of the best cooks that ever walked the face of the earth. No matter the dish, whatever she was serving up was unbelievably good.

Her home, in fact, was a hub of activity with both frequent guests and gatherings – all primarily centered around food. As a child, I recall an almost endless string of relatives (both close and distant) randomly showing up to find out what she was cooking.

Another interesting memory is, despite how she seemed to always be cooking, I do not recall many trips to the grocery store. Part of this was my grandfather grew or caught most of the food we ate, but another was that she seemed to be able to use whatever was in the pantry to whip up something delicious. 

She never planned meals but seemed to cook spontaneously depending on how the mood struck her. This brings me to the point – despite how incredible of a cook she was, she had no recipes. Literally, there were no cookbooks, no recipe cards, nothing. 

If you think I am exaggerating, allow me to amplify the point. Before she passed away, we wanted to know all of the recipes and how to cook the many dishes she prepared for us. We were all sadly disappointed to find out that not only did she have no written recipes, she also could not tell you what was in the various foods that she prepared or how to do it. 

Though we tried, she could not tell you how to do it. In the end, one of my cousins made it a point to go over once a week and watch while she cooked. She recorded every step and ingredient and was able to preserve the memory as well as the cuisine. 

Although you might think this is humorous, strange, or both, I think you may find that it is actually a very common phenomena. Perhaps we could dub it the phenomenon of familiarity. 

Think about where you live and the drive to your home, work, or school. Do you know all the street names you pass along the way? If you are like me, you probably know the main ones but have never paid attention to the smaller ones. Why? Because you know how to get there, and you do it habitually without really thinking. You may even find it difficult to give directions to someone to your home who is unfamiliar with the area for this very reason. You know how to get there but explaining is harder than doing it.

My point to this saga is that many institutions have facets that operate very similar to this. They do things on a daily basis habitually and mechanically. They may be very good at what they do and perform wonderfully. It may be a stretch to say they are “shooting from the hip,” but they are operating in a manner similar to my grandmother—they have no recipe. 

Having no Recipe May Be a Recipe for Disaster

Any area of an institution that could be subject to regulatory scrutiny may have a difficult time if they operate without a recipe. This is particularly true in the fair lending space. Even if there is not an inkling of inadvertent disparate treatment, a fair lending examination could be a grueling and agonizing experience without a recipe. A tell-tell sign is knowing how to do it but not how to explain it. 

The Difficulty of the Obvious

One challenge that goes along with this from the operator’s perspective is that most things are so obvious they require no explanation. Thus, when asked to explain them, they have never really thought about it enough to even know where to start. They may find themselves much as my grandmother did when asked how she cooked the things she cooked: she knew how to do it but was unable to explain it.

Another tendency is to leave out details that, again, to the operator, are so obvious there is no need to mention it. Again, my grandmother as an example – everything she cooked used a roux. 

This was a detail that in her mind was a given, therefore, not worth mentioning. One can see how something like this could create a major problem in a regulatory review. 

Where Does Your Institution Stand?

Operating without a recipe certainly introduces more risk and, at best, difficulty in a regulatory examination. One area that is particularly vulnerable is underwriting due to the wide ranging scenarios that may be faced. Underwriters also tend to overlook very important details that to them are givens. With respect to fair lending, loan decisioning remains an area of significant risk.

One simple way to test where your institute may stand would be as follows: First, assemble the lending staff and hold a mock criteria interview. Ask detailed questions about each facet of the loan decision and ask that all factors be both identified and quantified. For example, if good credit with the bank is a factor in the decision, how is this defined? Or is it defined? What about delinquent credit? If the customer has a good credit score, could they still be denied for derogatory credit? If so, can this be defined?

You may discover at this point that there is work to be done, and there may not be a reason to go to step 2 until these issues are addressed.

However, if you feel the answers were satisfactory, the next step would be to select a sample of loan files and see if what was conveyed holds true in practice. If you find it either does not hold true or there was a lot left unsaid in the interview, you will know what needs to be addressed. In either case, it will be an enlightening exercise and great preparation for your next fair lending examination. 

Having a Recipe

My grandmother’s culinary greatness notwithstanding, what does it mean having no recipes create risks for financial institutions?  We can think of what having recipes mean to answer that question. Recipes: 

  • are written
  • are specific
  • are measurable
  • provide details of what to do 

And, the tasks can be executed by anyone that follows the recipe. These are the key elements that reduce regulatory risk.


How to cite this blog post (APA Style): 
Premier Insights. (2019, March 1). No Recipe May be a Recipe for Disaster [Blog post]. Retrieved from https://www.premierinsights.com/blog/no-recipe-may-be-a-recipe-for-disaster.
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Premier Insights

Premier Insights

Premier Insights is an analytical and consulting firm specializing in econometric and statistical analysis for the banking industry, Fair Lending and CRA consulting, and other research and analytical services.

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