Can I ask how others are handling second review of denied loans? Based on volume, we currently did 10% of mortgages denied after the fact and 100% of HELOCs and home equity term prior to actual denial. Regulators are asking us to second review all product types prior to the adverse action going out. Can anyone describe their process and possibly regulator expectations.

Just curious. In your sampling - how many decisions are sent back for reconsideration?

It would be a rarity to be sent back for reconsideration.

I chair a committee of loan officers (one from each geographic area) and we meet by phone once every week or so. We only review marginal denials but the review is after the fact. Typically, if the reason for the decision is not clear from the officer's write up, we will ask the officer for further written clarification which is then included with the file.

I choose the marginal denials because prior to any adverse action notice being mailed, I review it for compliance with FCRA, ECOA, etc. While reviewing, if I notice anything unclear, that I think the committee might ask, I go ahead and ask for clarification so it's already there when the committee meets.

I also review all withdrawn files to make sure there are no reasons for denial, especially for files where the officer cannot get the applicant to respond to phone calls and emails as to the status. Officers often want to call these withdrawn.

Feel free to criticize this method. I am always open to suggestions.

Thanks for your input swiggles. I would not criticize your methodology - especially if your examiners are good with it! However, our volume would preclude us from doing that type of review upfront. We receive about 2,000 applications per month on indirect auto alone and the examiners want all product types reviewed.

Swiggles, I'd like to suggest that your bank is actually reviewing 100% of your denials. Though the full committee isn't reviewing all denials, you are doing an initial review to identify marginal denials. To me, this is the ideal process to mitigate fair lending risk.

Anon: As Swiggles pointed out, reviews of denials should serve two purposes: 1) a review of technical compliance (FCRA, ECOA, ect. as Swiggles stated) and 2) a review for fair lending. The goal of a fair lending review is to ensure that a different lender wouldn't have made the same loan, which would be reviewing for "comparative evidence of disparate treatment". The only way to really manage this risk is to review all denial for appropriateness. Therefore, the best practice is to have a centralized person (or group) reviewing denials to ensure they are consistent with comparable lenders. The thing with the fair lending review is that you really don't need to take a hard look at every denial as a review of marginal denials should generally be sufficient. To determine the marginal denials, I've often recommended establishing criteria as to what would need to be escalated up for true/in-depth consideration. For example, if a credit score is 212 or a DTI is 150%, there is no need to go any further than say "yes, they seem justified." The review of these denials should be extremely quick and will then result in a smaller amount of marginal denials that need scrutinized.

In my experience, most shops have a denial review process that somehow does review 100% (similar to what Swiggles does), even if hardly any time is spent on the obvious denials.

The alternative that larger originators often resort to is to have automated underwriting. If everything is automated, your risk of comparative evidence of disparate treatment essentially goes away (unless you start making exceptions), meaning there is no need to review denials from a fair lending perspective.

I had created a form with the following questions:

1 If the applicant requested a product not offered by the Bank, or if the product applied for cannot be approved, is there a product which might better meet the applicant’s needs?
2 Was the applicant given the opportunity to explain or refute any derogatory information in the credit reports or public records?
3 Was the applicant given the opportunity to obtain a co-borrower or guarantor, if it would have increased the likelihood of qualifying?
4 Was the applicant given the opportunity to provide additional collateral, if that would have increased the likelihood of qualifying?
5 Were any exceptions to underwriting criteria granted to other recent applicants with similar qualifications?
5a If the answer to 5 was YES, could similar exceptions be applied to this applicant?
6 Was the credit decision consistent with other decisions the institution has made in the past?

The preferred reviewer would be a credit review officer who looks at all credits, and would have knowledge if a similarly situated applicant was treated differently.

Thanks for the comments Adam. You make a good point with the auto approval - we also have that in place for indirect.

Thanks for your input Rocky. Yes as you indicated comparing to those that were granted an exception is the other part of the equation. I think we're going to need more resources!

Correct, Anon. I came from a large bank where what I do now would not be possible. But that bank had centralized underwriting for most consumer loans. Other loans required a second review and "sign off" (form in file) from another officer. My current bank is a small bank. The loan officers (or their assistants) email a .pdf of the file to a compliance mailbox, where anyone on our compliance team (though usually me) can review the file same day (usually), require that regulatory issues be corrected, all disclosures (if any) are included and if the denial is questionable, ask for a detailed explanation that may or may not keep the file from going to committee. The committee reviews AFTER the denial has been mailed, however.

For fair lending, the only loophole is that I only see denials. I don't see originations that might fit the same scenario. That issue has to be addressed in a fair lending review with matched pair analysis or some other method. We contract that task to external auditors.

Swiggles, the issue is "For fair lending, the only loophole is that I only see denials. I don't see originations that might fit the same scenario. "

Usually on close calls, there is an exception That is why I like to get a Credit Review Officer involved -

1 - it's a credit function,and they monitor the approvals and declines. They would normally get involved with the original decision where a loan should be denied, but an exception is used.
2 - There should be a record of loans with exceptions. If all exceptions are going to middle-age white guys, there is an issue.
3 - Credit is the one with experience and "skin in the game". They need to be aware of exceptions, who is making them and tracking.
4 - If a Credit Review Officer sees too many decisions overturned, or inconsistent, they can use that as a training exercise.

The Comparative File Review started at Decatur S&L in Atlanta in 1989. All the declines were legitimate, but there were worse credits that were approved - similar circumstances - different results. The examiners started looking at PRACTICE, rather than POLICY. Any declined files that were better than the "Least Qualified Approval" were considered discriminated against.

You may want to take a look using credit scores, DTI and LTV, there things that are potentially in every file. Identify the lowest credit score for an approved applicant, then look for declined applicants with better credit scores. Make sure the files are documented to reflect the underwriter's rationale, so an examiner (or attorney) picks up the file one time, then passes on it.

Same wit DTI and LTV. Identify credits denied for income and look at ones with higher DTI that were approved - same with collateral and the Loan to Value. Using that criteria, you may even be able to reduce your scope, zeroing on on the ones that may be problematic.

If there is an exception to Loan Policy or rates, etc, the application DOES go to committee for approval and those are noted in the files and logged.