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#2263371 - 12/08/21 09:03 PM Consumer Construction Loans
Frosh Offline
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Joined: Mar 2015
Posts: 89
My Bank would like to make two changes in Loan Policy for consumer construction loans. Any Fair Lending input or advise would be useful.

1. For TRID construction loans, my Bank would like to limit in loan policy its consumer construction loans to its assessment area and REMA only. This is for TRID construction loans only. If a consumer wants to apply for another loan type outside the Bank's assessment area or REMA, then that is still permissible

2. For any self-contracting construction loans, the Bank wants to add a reserve requirement in loan policy to have the consumer deposit 15% of construction costs into a DDA account. The DDA account would be a separate account outside the construction line of credit. The purpose of the 15% reserve requirement is that some Bank customers need draws between Bank inspections to pay sub-contractors in between Bank inspections and draws. Currently, customers may only draw on their line after a Bank inspection based on a completion percentage of the construction.

Would imposing these consumer construction loan revisions in policy create any potential fair lending issues? Thanks in advance.

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Fair Lending
#2263372 - 12/08/21 09:09 PM Re: Consumer Construction Loans Frosh
rlcarey Online
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rlcarey
Joined: Jul 2001
Posts: 83,227
Galveston, TX
2 is no problem

1 might be depending on your assessment area or REMA - redlining does not stop at some imaginary line that you choose to draw on a map.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2263373 - 12/08/21 09:13 PM Re: Consumer Construction Loans Frosh
Frosh Offline
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Joined: Mar 2015
Posts: 89
Randy, thanks for the input.

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#2263473 - 12/10/21 06:38 PM Re: Consumer Construction Loans Frosh
RVFlyboy Offline
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Soaring over Georgia
Even for #2, you should consider the possibility of disparate impact. While disparate impact is not, in itself, illegal discrimination, for any loan policy you should be prepared to show how it addresses a business necessity and should have considered if there are other less discriminatory ways to achieve that objective.
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Jim Bedsole, CRCM, CBA, CFSA, CAFP
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#2263474 - 12/10/21 06:45 PM Re: Consumer Construction Loans Frosh
rlcarey Online
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rlcarey
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Posts: 83,227
Galveston, TX
I guess I am hard pressed to see how, if the determining factor is whether or not someone is acting as a self-contractor when building their own home, would trigger any sort of disparate impact?
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com

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#2263610 - 12/14/21 04:02 PM Re: Consumer Construction Loans Frosh
RVFlyboy Offline
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RVFlyboy
Joined: Oct 2000
Posts: 5,991
Soaring over Georgia
Not saying it is a likely risk, just a risk that should be considered. Say, for example, in their market a majority of the self-contractor borrowers are minorities (or any other protected class). Now there is a distinct possibility that your policy, even applied without regard to race, may have a negative impact requiring larger reserves for minority borrowers. I'd want to see a risk assessment for the policy change that demonstrates consideration of the possibility of disparate impact (and to your point, probably assesses that risk as very low). To me, sound fair lending governance says ANY loan policy change should consider all possibilities of fair lending exposure.
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Jim Bedsole, CRCM, CBA, CFSA, CAFP
My posts - my opinions

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