Exception Rates

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

In this fair lending short, we are going to talk about loan policy exceptions.

A policy exception is when a lender approves an applicant for a loan when they don’t quite meet underwriting requirements. Maybe their credit score is a few points under your standards, but they get approved because of other favorable factors.

Exceptions also happen in the pricing practice when customers request a lower rate to maybe match another offer they received, a loan term is extended, or a fee is waived.

Every time a lender makes a policy exception, risk increases a little bit. If exceptions are very common, risk can increase dramatically.

Your exceptions are both a risk management and compliance issue. They affect your risk management program because every exception is a loan originated with more risk that what has been approved by policy.

They are compliance or fair lending issue because you risk lenders not granting exceptions equitably.

Here’s a pop quiz – if 30% of your loans go to minority borrowers, what percent of all exceptions do you think should also go to minority borrowers? 25%? 32%? Both acceptable answers.

But if 30% of loans go to minority borrowers, and they only receive 3% of exceptions, you have a major problem. They are 10 times less likely to receive a policy exception than white borrowers.

Track exceptions, include as much data as possible about the applicants, and ensure your organization grants them fairly and equitably and not on a prohibited basis.

Thanks for reading!

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