3 Questions for Gate House Compliance Team Member Mike Forester

3 Questions for Gate House Compliance Team Member Mike Forester

Question: Mike, what is fair lending risk?

Forester: First let’s make sure to define fair lending itself. It starts and ends with the law, which prohibits lenders from discriminating against applicants based on race, color, national origin, sex, familial status, disability, marital status or age. Fair lending risk is the potential for adverse litigation, regulatory action and reputational damage caused by insufficient attention paid by an institution to fair lending principles in all its operations. For a lender, vulnerabilities can hide inside five categories of risk: pricing risk, underwriting risk, redlining risk, steering risk and level-of-service risk. Through data analysis, we serve as an early warning system by pinpointing potential weaknesses in any of those areas that have been ignored, overlooked or mismanaged.

Question: So the threat that institutions face really isn’t litigation, regulatory action or reputational damage. Those are the consequences of poor fair lending risk management. But the fundamental threat is the vulnerability lurking from within. And the lender might not know where it is. Right?

Forester: That’s exactly right. It’s like a horror movie where there’s a monster in the house, and everyone’s screaming, “Don’t go in that room!” But you’ve got to go in the room. You’ve got to look in every closet and behind every door. Find the threat, neutralize it and help everyone get out safely. In our work, the goal is to identify the threat through data analysis, so that an institution can fix the problem and better manage potential trouble in the future. 

Question: Of the five categories of risk that you named, which seems to garner the greatest attention these days?

Forester: I’d definitely say the answer is redlining risk. Multiple regulatory agencies are strongly focused on it, and we foresee that commitment continuing well into the future. And remember this isn’t your grandfather’s redlining, when discrimination against millions of Black and brown Americans was codified by drawing on maps actual red lines around certain neighborhoods to indicate where a lender would not do business. I think we’ve borrowed the phrase “redlining” from that regrettable past to now mean something somewhat different, but equally important to test for. It’s what I would call “hidden redlining risk” and it’s uncovered through results-based analysis. For example, we can look at a lender’s marketing or, say, branching strategies, and reveal broader fair lending implications of those strategies that were unseen by the institution. It’s detective work that every lending institution of any kind needs to be doing.

Mike Forester is co-founder of CrossCheck Compliance. The firm is a key component of the services offered by Gate House Compliance.