Hi! It’s Tory Haggerty from Tuscan Club University’s Fair Lending School and welcome to another Fair Lending Short.

In this Fair Lender Short we’re going to talk about clarity in underwriting standards.  I always say that setting up strong policy and procedures is the best way to establish a strong fair lending program.  Now granted you need to actually follow those policies and procedures and that’s where policy exceptions come into play and that’s in a different video.  

What does it mean to have strong, clear, concise, underwriting standards? Writing standards themselves don’t usually fall under the compliance and audit umbrella.  Usually, safety and soundness and risk management executives are the ones who write underwriting policy. 

But you,  as a compliance and audit professional, as you’re reviewing those  you’ll want to look for clarity in policy and clarity in standards.  For example I once reviewed a loan policy that had underwriting standards that said no recent late payments. What does that mean? What’s recent? You could ask three different lenders what does recent mean to you? Does it mean no recent late payments in the last three months, six months, twelve months, twenty-four months? Does it mean no recent late payments with us or no recent late payments with others?  You see how you can have vague or ambiguous underwriting criteria and you give it to 5 or 10 or 20 different lenders, multiple different branches, and they’re all going to interpret it in different ways. 

So when you review your underwriting criteria you want to make sure it’s crystal clear and free from guesswork. If Lenders have to guess what you mean in policy, they will guess differently and they will treat customers differently which leads to fair lending risk.  When you review your policies and procedures and your checklist and your underwriting, you want to look at ait and ask if there is any way someone can interpret it differently? And if the answer is yea, you need to push back on management and tell them to clarify it, because people will do it a different way.