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Feature Understanding the difference between treatment and impact is an important step in developing an effective fair and responsible lending risk management process. Every step in the credit process should be evaluated for either risk—including but not limited to levels of assistance, product selection, marketing, credit underwriting, pricing, fees, appraisal practices, collections, loss mitigation, and foreclosure. •• Disparate treatment refers to a difference in treatment of applicants or borrowers on a prohibited basis that cannot be explained by other factors and may result from unfair, deceptive, or abusive lending practices. The risk of disparate treatment exists throughout the credit life cycle and is often the result of broad discretion, case-by-case exceptions, and limited or no quantifiable justification for variances to policy or credit standards. •• Disparate impact is generally the result of unintended consequences. A disparate impact claim of discrimination occurs when statistical analysis reveals that a prohibited basis group appears to have been disadvantaged by a business policy or practice that is facially neutral and applied consistently to all borrowers. Disparate impact is the more complex discrimination claim and the most controversial. The U.S. Supreme Court is scheduled to hear the a housing case, Mount Holly v. Mount Holly Gardens Citizens in Action, which many speculate will reverse the disparate impact standard in fair lending cases. The CFPB and HUD continue to declare their commitment to disparate impact enforcement. Shaun Donovan, Department of Housing and Urban Development (HUD) secretary, stated, "As we've learned over the years, housing discrimination comes in many forms. 22 | The M Report Discrimination doesn't have to be intentional in order to have a damaging effect." The CFPB's director, Richard Cordray, has vowed to "pursue discrimination in consumer financial markets based on disparate impact as well as disparate treatment. From the perspective of a consumer disadvantaged by policies that have a discriminatory effect, ent risk, establishing standards and controls for limiting risk, and developing appropriate corrective action plans when risk levels are outside of acceptable tolerances. The principles of fair and responsible lending risk management normally associated with loan origination apply equally to mortgage servicing and include Process Risk P rocess risk assessments are a qualitative approach to evaluating a servicer's inherent risk, effectiveness of the compliance management system, fair lending program, and control environment, as well as defining any residual risk. Process reviews are intended to "tell the fair and "Housing discrimination comes in many forms. Discrimination doesn't have to be intentional in order to have a damaging effect." —Shaun Donovan, HUD it makes no practical difference whether a lender consciously intended to discriminate." Regardless of whether the disparate impact standard is upheld, the possibility of discrimination claims in mortgage servicing is a very real risk. Mortgage servicers should begin developing and implementing fair and responsible lending risk management programs and internal controls that will withstand scrutiny of the regulators. Risk Management T he business of mortgage servicing is substantially about limiting risk and maintaining profitability. Every aspect of the credit process from application to payoff involves defining, accepting, and managing risk. Fair and responsible lending risks should be managed and evaluated in the same way as any other financial risk. Basic steps include identifying inher- levels of assistance, disparities in underwriting and pricing—as well as redlining—and steering. While there is a significant amount of fair lending information and guidance available from industry associations, law firms, and consulting firms, there are no "one-size-fits-all" solution assessment process. Every lender or mortgage servicer has business practices that create unique risk in processes and performance, including what is intended and what actually happens. Recent fair and responsible lending enforcement actions and litigation provide a framework of "best practices" for identifying, managing, and limiting fair and responsible lending risk. Fair lending settlements in general provide valuable guidance that applies to all aspects of the credit process, including mortgage servicing and loss mitigation. Effective risk management addresses process risk, as well as performance risk. responsible lending story" and provide answers to questions before they are asked. Developing a fair lending program that documents and defines how things "work" is an important first step in evaluating process risk. The key components of a fair lending program are defined as follows: •• Board/Senior Management Oversight – Does the board and/or senior management team understand fair and responsible lending risk? To what extent does the board and/or senior management provide oversight of fair and responsible lending risk management? How frequently is information and results of risk assessments, monitoring, and testing presented to the management team? •• Compliance/Fair Lending Management – What policies and procedures are in place to