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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.
3 Questions for Gate House Compliance’s Dror Oppenheimer
Nationally Recognized Credit and Underwriting Expert Speaks on CFPB’s Reg X Proposal:
“Having this draft language available gives mortgage servicers the opportunity to begin preparing now for a final rule.”
Question: We’re a little over a month away from the current deadline for public comments on the CFPB’s proposed rule for changes to Reg X. The proposal that came out earlier this month focuses on default servicing requirements and the framework for regulating how the mortgage servicing industry handles loss mitigation. Major industry groups already have responded pretty favorably to what the Bureau announced. Do mortgage servicers have anything to worry about here?
Oppenheimer: Keep in mind several trade associations have asked for an extension to the comment period. But I think that’s driven by thinking that a relatively short 60-day comment just isn’t practical in the summer season. Otherwise, you should expect to see a generally favorable response from industry. That’s because this announcement essentially boils down to the CFPB memorializing changes that it made on an interim basis in 2022 during COVID. Those changes were viewed back then as positive for both consumers and for servicers.
Question: What were those changes about?
Oppenheimer: They were largely about the streamlining and regularizing of the loss mitigation process and the rules designed to protect borrowers from preventable foreclosures. Ever since the pandemic, servicers have become accustomed to what had been instituted only temporarily. In fact, changes of this nature first appeared in 2014 when the CFPB standardized the foreclosure and loss mitigation rules for mortgage servicers following the financial crisis. Before then, there was a lack of standardization of loss mitigation rules across the mortgage industry. The industry has already been operating in this particular regulatory environment for the better part of a decade now. What the bureau is saying is, “How you’ve been dealing with Reg X over the past several years is the way of the future as well.”
Question: So, servicers have nothing to worry about?
Oppenheimer: I wouldn’t say it quite like that. On the one hand, it’s not at all surprising to see this proposal. At the same time, no one should ignore the task ahead at hand. Having this draft language available gives mortgage servicers the opportunity to begin preparing now for a final rule, which is almost certainty inevitable. I’d recommend they take a deep dive into the proposed language today to focus on any language that may be overly burdensome, and prepare their systems, policies and procedures accordingly. In other words, now is the time to make sure their operations, especially processes related to loss mitigation, line up with what the CFPB has signaled will ultimately be in place for the future.
Executives and board members in financial services are increasingly held accountable for the actions of their firms. Among their many responsibilities, they are required in particular to be engaged in their company’s efforts to adhere to the letter and spirit of laws that seek to ensure consumer protection.
As the regulatory landscape facing executives in the financial services industry has grown increasingly complex – and integral to their enterprises and their firms’ reputations – so too has the need to demonstrate and document the actions taken by their firms.
Gate House Chairman and Partner Brian Montgomery recently outlined the challenges facing executives in a piece for HousingWire. As he argued, even with the best of intentions, there are often inconsistencies and conflicting interpretations of what firms need or ought to do — and what executives need or ought to in order to stay apprised of their firm’s efforts. One thing we know it that it will require vigilance and a lot of hard work to get it right.
Recognizing the important need in C-suites and executive board rooms, Gate House Strategies has launched a new subsidiary, Gate House Compliance, LLC, to provide fair lending and compliance management services. The firm, comprised of veterans in financial services and specialists in fair lending and consumer protection law and regulation (and support from CrossCheck Compliance’s deep bench of experts), will advise and support compliance regimes across multiple asset classes, including mortgage, student loan, credit card, and other secured and unsecured credit products.
The addition of Gate House Compliance is a timely and critical expansion of the firm’s ability to serve the growing needs of the industry. After careful examination, clients can choose services that complement their current compliance program, or on a subscription basis, they may utilize Gate House Compliance 365, a comprehensive system of ongoing support of fundamental services and a coordinated, dynamic approach to the management of regulatory risk.
The important policy goals our country require executives to be engaged. They need experience, perspective, and insight in order to do what is right and, and – when the path is made unclear by conflicting policies or interpretations – what is prudent for business.
The goal for Gate House Compliance is to put executives and firms ahead of the curve and ahead of the scrutiny that characterizes the current environment and road ahead. Vigilance and a team of experts with a steady hand will be a must.
Gate House Partner and Chairman Brian Montgomery shared his perspective on the regulatory landscape facing executives in the financial service industry — the need to act responsibly with respect to fair lending laws and to understand the complexity of it all – in a piece for Housing Wire.
“[M]ultiple agencies pursuing the same general goals sometimes creates inconsistencies or conflicting interpretations of policy, making it difficult for financial institutions to navigate uncharted waters, even with the best of intentions.” Montgomery wrote.
Montgomery, who served as Deputy Secretary of HUD and FHA Commissioner twice, emphasized the risks, particularly in the areas of lending and loan servicing: “Recent regulatory actions have targeted marketing practices, credit allocation and product offerings,” he said, with top executives more often being held accountable for their “company policies, procedures, operations, and culture.”
With risk to the firm not only financially but reputationally, the need to “identify gaps that may exist in their knowledge and experience and structure management teams accordingly” is paramount if they are to demonstrate to overseers that they possess a comprehensive approach to their compliance obligations.
Private industry participants have their work cut out for them as they go about the critical work of upholding the letter and spirit of our country’s fair lending laws, Montgomery said. Both private firms and government must work together at times, with private industry willing to serve as partners to government and the government for their part providing “transparency, open dialogue and technology improvements” to make our system work.