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 I want to talk about exceptions, and I want to talk about exceptions from a risk manager standpoint.
I train lenders all the time. I’ve trained thousands of lenders over the years . I joke that it’s my goal at the end of this training, to scare you from making a loan ever again. Of course that’s not true, I’m just trying to lighten the mood when I do fair lending training because honestly, it’s pretty boring.
But the idea is to minimize exceptions. Exceptions are both a management issue and a compliance/ fair lending issue. They’re a risk management issue because every time you go outside of loan policy, you’re making a riskier loan. They’re a compliance/ fair lending issue because every time you go outside of policy you risk doing that on a prohibited basis.
I say this all the time, strong policies and procedures consistently followed is one of the best ways to mitigate risk. Every time a lender makes an exception, they open that door a bit more, and then they make another exception and open it a bit more, and a little bit more, and then all of the sudden if you make too many exceptions, you blow that risk door wide open and those great concise clear policies and procedures lose their effectiveness.
So when I train lenders, I tell them exceptions aren’t necessarily a bad thing, it’s going out of your way to do right by your customer and get them approved. But when you make exceptions too often, you’re taking on too much risk, and you risk doing it on a prohibited basis, which is essentially what we’re trying to prevent.
For example, do you make exceptions for men, but not women? Do you make exceptions for white borrowers but not minority borrowers? Do you make exceptions in low minority neighborhoods, but not high minority neighborhoods? Every time you make an exception you open up that risk a little bit more. Exceptions should be just that, the exception. If you make exceptions 50, 60, 70 percent of the time, it’s no longer the exception, that’s your norm. You either need to scale back on the number of exceptions you’re making, or rewrite policy to better reflect the way you actually make loans.
Thanks for reading!
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