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What Good Are Bad Loans?
Bad loans can be a valuable source of information. The most important thing that you can learn from a loan that has gone bad is how to avoid making a similar decision in the future. In short, reviewing bad loans can help you to improve the quality of future lending decisions.
In the context of CRA and fair lending, learning from delinquent loans can be an important component of your program. Essentially you can garner two important areas of information from loans gone bad.
First, you can learn how not to be flexible. Do this by comparing the delinquent loans to the original application, underwriting, and decision process. Look for whether the underwriting process succeeded in identifying the weaknesses that led to delinquency. If so, those weaknesses should be treated more carefully.
Second, you will identify necessary underwriting criteria that may be unique to your market. When asked why you do not use more flexible and presumably less discriminatory underwriting factors, you will have the answer. Your default analysis will show the need for the specific criteria and settle the question.
Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 12, 11/99
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