Gate House Compliance

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. 

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For his June cover story in National Mortgage Professional, staff writer Ryan Kingsley interviewed key members of the Gate House Compliance team, including partners Brian Montgomery and Michael Waldron, and top Gate House consultants Paul Hancock and Liza Warner.

Kingsley examined “the modern theory of redlining,” efforts by regulators and enforcement agencies to advance allegations of redlining “without demonstrating a lender’s intent to avoid or otherwise restrict access to mortgage credit in those communities.”

The modern theory, Kingsley writes, rests largely on whether lenders “originate a below-average number of mortgages in CRA-eligible census tracts,” which then “manufactures perceptions of discriminatory lending, while pushing lenders to manufacture their fair lending compliance.” The result is both enforcement and lender’s compliance becoming “a data exercise.”

Montgomery, who has served in the White House and at the highest levels of government across four different presidential administrations, argued that “even if there’s a change in administration, there will continue to be a focus on this topic, as there should be.” Moreover, the focus today has evolved to include not just to lenders but mortgage loan servicers, who have traditionally not kept data on the race of borrowers, putting the industry in new territory.

Hancock, a partner with K&L Gates who led the fair-housing and fair-lending enforcement program at the Department of Justice, offered a perspective from someone who has litigated fair lending compliance issues for four decades, maintaining that the approach the government is taking under the modern theory presents a real challenge:

“Our clients abhor [redlining],” but“[i]f the government is actually demanding a racial balance in loan originations, saying all lenders in the city of Chicago should make 20% of their loans in minority neighborhoods,” [for example,] “that’s a demand for a racial balance that is prohibited by the Constitution,” Hancock said. “It’s prohibited by civil rights laws. I think that, if tested, it would be rejected by the courts in this context.”

“Under the government’s theory, you can eliminate redlining by just making fewer loans in white areas. You’re not doing any more in minority areas,” Hancock says. “You’re making fewer loans in white areas and somehow that solves your legal problem. That just doesn’t make any sense.” Hancock says there hasn’t yet been a major case around fair servicing yet, though the government is looking for one. Hancock also notes: what is being demanded of lenders (and servicers) could change, putting them in a tough spot.

Waldron, who served as chief compliance officer for Bayview, says that the regime in place for many mortgage servicers (compared to fair lending) is “not as mature of a structure and mature from a thought-leadership perspective,” making it more difficult for servicer to stay ahead.

Warner, a partner with CrossCheck Compliance who leads its regulatory compliance, internal audit, and risk management team, and has 35 years examining the issues, concurred. Warner says the servicing side is “obviously is not as mature of a process of monitoring as it is on the origination side, and you don’t have a set of data like you have the [Home Mortgage Disclosure Act] data to compare results against.”  

“It’s a little more challenging that way., Warner states, “you really have to understand what’s happening within the operation in order to conclude on anything with respect to the data.”  Servicers “need to make sure as a company that the data is accurate, first of all, and that as an organization [they] understand what the data is telling [them], Warner says.

Hancock notes a large problem for the industry and with the government’s approach: much of the data available to lenders for analysis offers a rear-view perspective, making any ongoing benchmarking with peers implausible.

“What you don’t want to do,” Waldron explains, “is take action that inadvertently doesn’t mitigate the very issue that you’re trying to solve for.”

Kingsley concludes: Drawing bad conclusions from good data can lead lenders to make misguided investments or operational changes, inadvertently increasing long-term risks.

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