I have the following situation:

With respect to residential loans, our bank's policy requires a 720 FICO score for borrowers applying for a mortgage loan. However, I had a Loan Officer who wants to approve a mortgage for a client of his where the FICO is 700 instead of the 720 that the bank's policy typically requires. My question is since we have always consistently approved loans at 720 FICO score and now we are all of a sudden making an exception by approving the loan at a 700 FICO would there be any potential violations, as it relates to Fair Lending rules? I know that Fair Lending is now a "hot topic" and I want to make sure that we are not in violation. Any guidance would be greatly appreciated. If there's a link or some citation addressing this issue I would be grateful.

Regards,

Fair lending covers serveral regs: REG B, Fair Housing, HMDA, and CRA, so finding a specific cite would be wonderful, but it not going to happen as there is no easy answer.

Answer first a few basic questions: (1) is score the only factor when making a decision, (2) why are you making the exception to your policy, 3) would the exception apply to everyone with a 700 score, (4) are exceptions fairly common, and (5) what does your policy say about exceptions and how they are handled.

That's not to say you can't make exceptions. But regulators will look at your overrides and exceptions to policy. Red flags may result depending on the reasons and whether there are trends that show potential fair lending issues or lack of consistency in application of policies. Your underwriting policy guidelines should address how exceptions are reviewed, approved, and docmented. Judgemental decisions without guidance can land you in trouble.

Common place at banks is a loan officer who wants to make the exception because he can get a large deposit account if he does, or he can gets incentives for loans or other scenarios. Be very careful of the perception of fair lending isses with any discretionary underwriting of exceptions. And make sure it is documented clearly and completely.

Thanks! In answer to your question(s), it is my understanding when I spoke with the loan officer and upon reviewing the file that there were no other factors considered when making the decision. In fact, the L.O. informed me that the Underwriting Manager made an exception in this case. As to why we are (i.e.Underwriting) making an excpetion to our policy, I honestly do not know. Would the exception apply to everyone with a 700 score? Again that is is something that U/W would have to address, but in my opinion it should apply to everyone with a 700 FICO. Whether exceptions are fairly common, I am not sure. I am reviewing the their U/W policy to find out, as this is only my 3rd day here as a new employee. My primary concern from a compliance perspective was whether or not it would be considered a violation of Fair Lending rules. You are correct in that this is no easy answer and that's too bad. Thanks again.

Marnie,

I should have also mentioned that the loan is a residential portfolio loan i.e. our bank will retain the servicing. Not sure whether or not that makes any difference.

Since this seems to be the first exception, it is a good time to establish rules for the future. You could even build some flexibility into policy. There need to be firm reasons for variations for approval and for pricing to avoid willy nilly treatment of borrowers.

720 was picked as a control over risk. What would be another acceptable requirement to mitigate that risk...high liquidity, low ltv, highly profitable commercial relationship?

The bank needs parameters, a written approval process (written in policy and a physical or electric signature approving the transaction), and tracking.

Just throwing this out, but would a policy that has a minimum credit score to even go forward with application process (only those scores above 650) but bank could make exceptions to scores below 650 for current borrowers who have paid like clockwork)... cause us any grief in the Fair Lending area. In other words, a brand new applicant with a score of 580 would be denied, but a long time paying customer with a score of 580 would be an exception. ???

The fact that you retain the servicing has no bearing really. I agree with what Kathleen said--rules need to be established, so check the policies to see if they are. Then sit down with underwriting and find out what and how they operate. Is it consistent with the policies and is fair lending a factor in their underwriting? Since you are so new there, I would do a risk analysis by getting a list of all exceptions since the last exam and do a fair lending analysis. Making an exception doesn't create the violation in itself. You need to see why it was made and answer the other questions. There are a lot of helpful tools on BOL for this.