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#2158832 - 12/30/17 06:15 PM Loan Policy Enforcement/Follow Up
MScarn6942 Offline
Platinum Poster
Joined: Aug 2015
Posts: 756
Land Lacking in Lakes, IL
Who handles the follow up or enforcement of your loan policy? Right now, our President does it, but a lot of the inconsistencies with underwriting exceptions and "special situations" are coming from him. The policy itself isn't terribly specific (we're $55MM, so it's been tough to come up with firm guidelines when each situation is different), but there are times where an unsecured loan or a vehicle loan will go through that doesn't meet policy guidelines. It's difficult for me to do the follow up since he's my boss, and there isn't another department or anything to keep that accountability. Any suggestions?
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"Pressure is something you feel when you don't know what you're doing" - Peyton Manning

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Lending Compliance
#2158909 - 01/02/18 07:19 PM Re: Loan Policy Enforcement/Follow Up MScarn6942
HRH Okie Banker Offline
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Joined: Jan 2003
Posts: 3,070
Oklahoma
Our Credit Dept monitors things like term and LTV and deviations to policy are noted as exceptions and require approval other than the lender (depending on loan amount). Exceptions are tracked and reported on to our management and to board. We are OCC and they require a more specific loan policy as to limits and concentrations....
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#2158934 - 01/02/18 08:58 PM Re: Loan Policy Enforcement/Follow Up MScarn6942
Rocky P Offline
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Joined: Jun 2003
Posts: 7,423
Florida
Take a look at the Fair Lending Examination procedures. Inconsistencies are the greatest issue when examiners are looking at disparate treatment (treating applicants and borrowers differently). A 'favor" to one applicant can easily be looked at as discrimination to a similarly situated applicant. In a file review, examiners know that there are going to be some applications that are 100% good and others 100% bad. What they look at are the ones where exceptions are given to one party and not another. If (for example) exceptions, without other consistent documentation, are made for white applicants and the same are not make to Hispanics (or other protected class), then that might result in a referral to the Department of Justice.
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#2158950 - 01/02/18 10:00 PM Re: Loan Policy Enforcement/Follow Up MScarn6942
HRH Okie Banker Offline
Power Poster
Joined: Jan 2003
Posts: 3,070
Oklahoma
Inconsistencies can also lead to fraud. Fraud can be made easier when you don't track exceptions items or outstanding CIP issues.

Special situations are not unusual but need to be documented as to the mitigating factors that led to deviations from other loans in your portfolio. You want to make sure you note "large balances" or "trying to obtain comm'l business" if you give a loan with a lower than normal rate or term.
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Just working here until I get my letter from Hogwarts.

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#2158966 - 01/02/18 11:09 PM Re: Loan Policy Enforcement/Follow Up MScarn6942
Rocky P Offline
Power Poster
Joined: Jun 2003
Posts: 7,423
Florida
HRH gave some great advice too. Exceptions should be recorded, reviewed, analyzed and reported. Analysis for multiple reasons - are they performing similar to loans without the exception, is that particular policy necessary or a burden? If the exceptions are being granted more often than not, what is the purpose of the policy. Are only certain LO's making an exception and why? Without that analysis, the lender is just violating policy without understanding the risks and rewards.
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Integrity. With it, nothing else matters. Without it, nothing else matters.

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#2158979 - 01/03/18 01:27 PM Re: Loan Policy Enforcement/Follow Up MScarn6942
Adam Witmer Offline
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Joined: Sep 2010
Posts: 2,629
At $55mm, I'm guessing you only have two lenders and less than 15 FTEs. If that is the case, segregation of duties and independence is extremely difficult - not to mention that the President (your boss) is where the inconsistencies are coming from.

Personally, I would consider doing several things. First, I would approach the President pro-actively and explain that you have heard that fair lending is a hot topic (it always is) and that inconsistencies have been known to cause concern with examiners and even referrals to the Department of Justice (DOJ). I would then attempt three things.

First, I would work to create both a more formalized 1) exception review program and 2) adverse action review program. I strongly believe this is one of the best ways to reduce fair lending risk, regardless of the bank size. I have seen banks your size do this through tracking logs and regular meetings to compare denied loans to exceptions. In a small bank like yours, it can actually be fairly easy to manage because you could have every lender aware of all denials and all exceptions so that each lender is aware of any possible inconsistency from exception to denial before an exception is granted. Ideally, you would have all exceptions discussed as a group (again, there are probably only two or three of you) before the exception is granted. Regardless of your actual implementation, getting as formal as possible with both your exception program and your adverse action review program will give you a story when examiners start to discuss this. I know of a few banks your size that discuss all potential exceptions as a group (to verbally compare to denials) and this process does help give examiners a greater comfort level than if lenders are just arbitrarily making exceptions. The bottom line is that you don't want overlap between your best denials and worst approvals, and having a pro-active discussion comparing denials to a possible exception is one way to reduce your risk.

The next thing I would consider is evaluating what is being reported to the Board. If you have never reported exceptions to your board (which may be the case for a $55mm bank), it might be time to consider this. Escalation to the board of high risk areas (like fair lending) is an important component of compliance management. You may not like certain decisions made by upper management or the Board, but if the Board - who is ultimately responsible - has signed off on it, you should be able to wash your hands of it.

Finally, I would consider conducting a fair lending comparative analysis where you formally compare your most qualified denials with your worst qualified approvals of a similar loan type. As your bank is small, you probably have a limited number of marginal protected class denials, meaning that you could probably review them all. I would start by going through all of your denials and identify two things: 1) the most qualified denied applications and 2) all denials to a protected class. Of course, your primary concern is the denials to the protected class applicants, but reviewing the most marginal denials that are not to a protected class will also identify potential fair lending risk if the pattern continues. Once identified, you will want to conduct an analysis of each denial and compare them to your marginal approvals. Once your review is complete, I would formally document my findings and report them to the Board. The key will be to make sure you pro-actively take steps to correct any deficiencies noted in your review. Now, this review could be outsources so that it is clearly an independent audit, but if you can't get those resources, your review will still be considered a valuable monitoring activity. The bottom line in this is to self-identify any risk and then take any needed corrective action.
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Adam Witmer, CRCM

All statements are my opinion, not those of my employer, and should not be taken as legal advice.
www.compliancecohort.com

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#2158990 - 01/03/18 02:56 PM Re: Loan Policy Enforcement/Follow Up MScarn6942
MScarn6942 Offline
Platinum Poster
Joined: Aug 2015
Posts: 756
Land Lacking in Lakes, IL
Thanks everyone for your suggestions and tips! Adam, you're exactly right that there are two of us (just promoted a third yesterday). I like the idea of doing a review and presenting to the board - if they sign off on it, then I can be done with it (kind of, I sit on the board, too, but I can always vote against the majority smile ).
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"Pressure is something you feel when you don't know what you're doing" - Peyton Manning

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