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#2197504 - 11/06/18 09:22 PM Mitigating Exceptions
CRAzy_lady Offline
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Joined: Dec 2012
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I am currently doing a fair lending review on consumer loans. We have pretty well-defined guidelines for all of our loan products, but we allow lenders to make exceptions to policy. As part of my reviews, I consider the validity of any mitigating factors listed for decisions or rate concessions. I often come across reasons that, in my opinion, are vague or just don't adequately mitigate the approval or rate concession.

For example, I have seen "length of residence" used as a qualifying factor for an auto loan. How does that mitigate the risk of a borrower whose credit score is outside of our guidelines? Is this a commonly used mitigating factor for the approval of a loan?

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#2197514 - 11/06/18 10:07 PM Re: Mitigating Exceptions CRAzy_lady
Rocky P Online
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IMHO, length of residence in town went out in the early 1980's. That was before credit scores became the norm and reflected a stability not to skip, not any indication of repayment. (As far as I'm concerned, the only time length of residence would come into play is in the square footage of a home.)

The issue comes up that if a concession (or exception) is done for one, then it would be discrimination if not done for all that might apply. And that is across all loan officers, as the loan is being made by the bank, not the person making each decision. If you were to identify an applicant with a similar credit score that was denied, and look at their residence history (and make it clear that an examiner can say that in the same town would also apply) and they've been living there for a similar amount of time, IMHO, they have been discriminated against.

Exceptions should be quantifiable, recorded, analyzed and reported. Long time customer means nothing. An account relationship for example, can be a $2,000 unused credit card - which proves nothing, to a relationship that the person had a similar amount of credit that was paid as agreed.
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#2197517 - 11/06/18 10:30 PM Re: Mitigating Exceptions CRAzy_lady
rlcarey Online
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(As far as I'm concerned, the only time length of residence would come into play is in the square footage of a home.)

laugh Best line of the day
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#2197537 - 11/07/18 01:24 PM Re: Mitigating Exceptions CRAzy_lady
CRAzy_lady Offline
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Joined: Dec 2012
Posts: 56
I have recommended in the past that mitigating factors should be defined and guidance should be provided on when/how to use them. So how do I get the point across to management?

Rocky P, does your bank allow exceptions? If so, do your loan departments have written guidance on how to mitigate them?

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#2197539 - 11/07/18 01:30 PM Re: Mitigating Exceptions CRAzy_lady
Skittles Online
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We allow exceptions to policy (although I'm not Rocky); however they must be approved by Credit Administration and the Chief Lending Officer. Lenders are not allowed to approve exceptions for loans they originate.
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#2197540 - 11/07/18 01:44 PM Re: Mitigating Exceptions CRAzy_lady
Dan Persfull Offline
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Bloomington, IN
^^^^^ What Skittles said. Even our President cannot approve an exception for a loan he originates. It must go through our procedures outlined in our policy.
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#2197547 - 11/07/18 02:38 PM Re: Mitigating Exceptions Dan Persfull
Rocky P Online
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We allow exceptions to policy (although I'm not Rocky); however they must be approved by Credit Administration and the Chief Lending Officer. Lenders are not allowed to approve exceptions for loans they originate. and Dan's too.

When the person is reviewing, one of the things they should be looking for is were there any similar applications/loans that were not granted the exception? If there were, it is possible that an examiner could look at the two as a "matched pair". If a protected class applicant (technically, everyone is protected)/minorities keep coming up on the short end of the stick, the bank will need to explain to the examiners why.
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