The Thick Red Line with Tory Haggerty

I'm excited today to be back with a former guest of the podcast. Tori Hagerty. Tori, how you doing today? I'm great, Mark. I appreciate

Consulting and what you did before that, et cetera, et cetera. That brought you to the point of being able to write these two great books.

And I quickly realized that not a lot of organizations do fair lending audits. And some of them that do, they're just pretty high level. And I said, yeah, absolutely. I can do a fair lending audit. I learned as an examiner, I know that the techniques I have access to tools. So I started doing them and then eventually. I had people ask me what are you doing? How do you do this? So then I started offering to train people. And then that sprouted into the idea, why not create a fair lending school?

There's no commercially available fair lending school in the industry, at least not at the time when I created mine. So back in 2019, we got the idea. I literally spent a year of my life writing this manual, filming videos and creating the fair lending school under Tuscan club university and our fair lending expert FLE certification. And then over the span of my career, over a decade and a half and over 400 exams and audits, I just, I saw so much.

So many different organizations, so many different ways of doing things. Some of them really good, really smart. And some of them really bad and really dumb. And I collectively put those together, created the school. And then, I got the idea let's put this into a book. Not everyone's going to go through the fair lending school and not everyone should, it's really devoted to compliance officers and auditors. But what about the average lender? What about the average.

President or CEO or chief credit officer. They need to learn these things too. So we summarize some of the best ideas, put them in the book. Now in the original book, unfair lending, we walk through the whole light loan life cycle of fair lending risks. It's not just redlining there's application risk and steering customers into products, obviously underwriting and pricing are big ones and several others. redlining is really the culmination of kind of fair lending overall.

And. We just, I just determined that this really is a large enough topic to write another book on now. You probably heard of and most of the listeners probably have heard of the combating redlining initiative from 2021 from the federal government. And they basically said, we're going to really dig deep into this. And that's why we've seen so many redlining cases over the last 2 or 3 years, because the DOJ and the federal regulators are partnering to, try to put an end to redlining.

The sad thing is, or the odd thing is these issues just keep getting repeated over and over and over again. I mean, you can look at redlining cases from 20 years ago, and the exact same problems are getting repeated over and over again, which leads me to believe that it's an education issue. We need to teach people, and that's what this book is focused on. Here's what the issues that you run into, here's how you fix them, here's some other things that lead to redlining risk.

So before we get into more of the details of what's in the books and, how financial institutions can do better, et cetera, et cetera let's do a reminder of the definition of redlining by law and, or by Tory.

So redlining dates back, nearly a century, well, probably longer than that, but really with the creation of the FHA in the 1930s, then later the VA, they literally would not approve home loans and guaranteed home loans for people of color. Now, notice I said the VA, and I mentioned this in my book, I'm a 20 year Air Force veteran.

So that, it pains me to believe that an African American can go fight in World War II, three years, come back, and then can't get a home loan approved because of the color of their skin. And this happened for decades and the federal government along with state and local and municipal governments created neighborhoods and barred people of color from living there and people of color were not allowed to get home loans often had to rent government housing often run down far away from where you work.

Near maybe landfills or power plants and undesirable areas. Obviously, that has higher pollution, which leads to more health issues, not building equity in a home, which is the best way for almost all families to build up wealth, including generational wealth. And that's why there's such a wealth gap in a home ownership gap between white and any other race of people in this country, because, anyone of color was just restricted from getting a home loan for so long. And it's so hard to catch up.

And now with housing prices and, rates where they are. It's literally impossible unless we do something out of our way to make it happen.

here today. Redlining examples, you talked about the different examples you've seen in all the audits you've done and probably the people that you've taught have told, I've shown you some others. You said there's a definite theme to the mistakes that are happening. What would you say most redlining cases actually have in common?

Number two, the applications that an organization has received. If you receive applications two and three and four times less often, from high minority areas and minority individuals than your peers are, that's a major red flag. The next thing we look at, factor number three, is advertising and marketing efforts.

Now, you can have branches in high minority areas or near them, but if you are not advertising and marketing in those areas, or another issue that we've seen a lot lately is devoting lenders to those areas, most specifically mortgage lenders. If, You have a branch, one branch in a high minority area. You're not marketing, you're not advertising, and you don't have any mortgage lenders there. Guess what? You're probably not going to get applications and you're not going to be making loans.

The fourth factor, we look at loan origination rates. Now this is one where we use ratios a lot. If you have good, if you're a HMDA reporter where you have to collect information on all your home loan applications, And you have significant data, and sometimes that can even be a few hundred applications is enough to get some good indicators on your performance.

You can employ fair lending software, either purchase the software yourself or have somebody review it for you and look and see what are our origination rates. Two minority individuals in high minority areas compared to peers. When you are two, three, and four times lagging behind what peers are doing, those cases, those are cases that have been settled by the DOJ. Those have already been referred and settled. So I've seen, and had clients that are five and six times behind there.

So what we do is we identify those issues and those anomalies and determine what the root cause is. And then immediately put corrective action in place. If you catch these things early and you're serious about it and you devote the resources to fix these problems, I've had clients where we found these issues early, they've implemented corrective action.

The regulators said, okay, we're good with that, but you better, make good on your promises and we're going to be reviewing that and they have staved off, referrals to the DOJ. The fifth factor I like to talk about is product offerings. If you don't offer products. In an area that people are going to qualify for, they're probably not going to get loans from you. Because of the racist history of our country in barring people of color from home loans, they appear less credit worthy. Okay?

A credit score is a great example. A credit score is not a perfect process. It takes your, repayment history and your debt utilization on a lot of different things and comes up with a numerical score. What about somebody who rents? If you're, if your family or you've been barred from getting a home loan, you got to live somewhere. That means you're going to rent, but rent doesn't get reported to the credit bureau oftentimes where a mortgage does.

So somebody could be for the last 10 years living, and paying their mortgage every, or paying the rent every single month and not get credit for it. Therefore they're going to look less credit worthy on paper. If we don't consider other factors like that. Factor number six is community involvement.

With banks and credit unions, one of the best ways to get customers and be involved with your community is know those community members and those organizations that can reach the people that you are potentially currently not reaching. Those high minority areas, those minority individuals, sometimes low and moderate income areas. So those are some of the things that, that we see as continual problems. That pop up in almost every single redlining case.

It's just like one gets copied and then we slap another organization's name on there and it just gets repeated over and over,

And we can maybe get into that a little bit, but one other, so you talked about advertising and if you don't advertise in a particular area you're, they're not going to know what you have available and they're not going to come into the branch. And then they're not presuming you have a good brand structure.

And advertising has kind of morphed over time, right? It used to be when. When when these maps we talked about were published in hard copy advertising was the morning and the afternoon paper, then it went from just the two papers a day to the morning paper. And today you got, you got people that, and TV over the air versus cable. And it, advertising on Facebook, et cetera, et cetera.

When I throw that out there Advertising today versus advertising in the days long ago, does that trigger any examples or of any situations where, aha, someone could do better on advertising in today's world in this way?

Now you have obviously local markets. If you work in a Metro area, you can do as well, but now you can target market into certain geographies, into certain individuals, if you do that, when it comes to loan products, though, the equal credit opportunity access, you can't discriminate based on race, color, religion, sex, and national origin, and there's other characteristics in the fair housing act as well, age and marital status, things like that.

So when you target market an area, a lot of times what organizations will do is they'll geo fence. In other words, they will say everyone within, two miles or five miles of our branches, that's where we're going to market. And that's generally safe, but guess what? If you don't have branches in high minority areas, you're not going to market in high minority areas. So there are things that you need to be aware of.

But yeah, the first thing you do is you look at why aren't you taking an application? You don't have any branches there. You're not marketing there. You can't expect somebody to drive 30 minutes to your closest location, pass, five banks and credit unions on the way or not want to go online and come into your branch and fill out an application.

You can also pay, external auditors to do audits. We also do audits as well, but we're a pretty small company.

Some of the corrective actions to put in place, though, so we talked about what are some of the issues and how do you identify those? Now, if you find those issues, what are you supposed to do? Number one, obviously, open some branches in previous red line areas. There are tools out there with the fair lending software that will geocode your branch locations, overlay it on a minority map.

And it will show you where your branches are and where they are not and how they are avoiding high minority areas. And guess what? They often make what's called a horseshoe. If you don't know what a horseshoe is, it's like the letter C, except, maybe turn sideways. But a horseshoe basically is where the branches surround. high minority areas, but they're not in those high minority areas.

Now, obviously opening a branch is not cheap either, especially if you're going to have cash and a vault and all the security. So sometimes a loan production office is a great way to get yourself a physical presence in an area, test it out for much cheaper than a branch. And organizations use those as well to see is this area going to be profitable? And oftentimes they turn it The second one is doing a community needs assessment.

And that's where you go out and you say, okay, let's figure out what our community actually needs. Do we need low income housing? Do we need, to finance small businesses? Or, what kind of needs does our area, basically talking with individuals, talking with real estate agents, talking with the small business administration, talking with experts in the industry to find out, Okay, are our credit products matched up with the needs of our area?

The third one is forming those community partnerships, getting your loan officers and getting your, management team out into the community and becoming members of these groups and reaching out to these groups. Oftentimes one or two connections in the right group can get your foot in the door. And I've seen it over and over again, especially with immigrant populations who have a language barrier.

Let's imagine Mark, you move your entire family over to Japan and you don't speak a word of Japanese, but then all of a sudden you find one bank over there that has English speaking personnel. Guess what? You're probably going to bank with them and then you're going to tell your family and your friends who also moved over there with you. Hey, these guys understand us, so it's a matter of meeting those community needs and forming those partnerships. The next one is a loan subsidy fund.

You don't have to go out of your way to do this, but this is one of the items that frequently shows up in every settled redlining case. The regulators force you to create a loan subsidy fund, which is used to subsidize loans for people that need them. They otherwise couldn't afford it. And that could buy down rates that could buy down or help with down payment assistance. And, Make payments more affordable. Another one is special credit purpose special credit special purpose credit programs.

And that's basically where you develop products specifically to meet areas or meet needs of those individuals that otherwise wouldn't qualify. Now, one of the downfalls with that is if you see a need for a special credit. Credit product in your area, see who else is offering it as well, because if three or four other organizations are offering it, you offering it may not have as much impact as another product would.

And then of course, invest in marketing and advertising, take some money and invest it into, to Google searches and Google advertising. So when they search best deposit account, best consumer loan, best home loan, your name shows up. Invest in social media marketing, And then the last one is you can hire experts to assess your compliance management system. Every fair lending review we do, that's the heart of the fair lending review is, do you have policies in place? Are they clear?

Are your procedures clear? Are they free from guesswork? Are you training your individuals? What type of monitoring and auditing are you doing? Having somebody that understands that and then gets into the testing, then test interest rates, then test denial rates, then looks at HMDA data. And that can tell you where your holes are and where you have room for improvement.

Any thoughts on the link of appraisal bias to the topic of redlining and anything you'd want to discuss on that?

allows their personal bias or unconscious bias to come through in the appraisal process. So it's not like buying a car. You go out to the, Kelly Blue Book or NADA, and it gives you a pretty fair value, right? You may put your zip code in there because it wants to know what part of the country you're in, but it doesn't know what neighborhood you live in. It doesn't know your race. It basically says, here's a fair market value of your vehicle.

Obviously on a mortgage or on a home loan, if you've ever went through that process, which a lot of your listeners have. We don't have that. You can't plug and play and get a value out there. A person has to go out there, a licensed appraiser, and give their value based on a lot of factors, based on comps, based on improvements, based on the market.

Unconscious bias comes through, and those appraisals are often devalued by sometimes as much as 50 percent for individuals of color, or if a home is located, In a high minority area. So there have been a several major cases lately, but the Austin's out in the San Francisco Marin County region. I do reference them in my book. They were one of a one of the big examples. So back in about 2016, they had purchased a home and they spent a lot of money and did a lot of renovations on it.

And the original home, they, I think they purchased for just under a million dollars. And. Through all these renovations and whatnot, the value is up to about 1. 4 million. And then they go back in to refinance it all, put it into OneNote, and the, they just had an appraisal done a year prior, and then they had a female white appraiser come out and they appraised the value at about 950, 000.

And they knew this is, this can't be, there's no way it was just appraised for almost a half a million dollars more than that just a year ago. So they complained to the bank and the bank said, yeah, let's get another appraisal and what they did was they caught, they whitewashed their home.

Now, if you're a person of color listening, this is probably old news to you, a 40 year old white male like me living in, the middle of upper Midwest and South Dakota, I've never heard of this term before a few years ago. And essentially whitewashing is where you. You remove all evidence of who lives there. Now, when you sell your home, it's probably a good idea anyway. You don't want pictures of your family all over the place because people won't imagine that their family lives there.

They'll see your family. But what about the Austins? They're just refinancing. Why do they have to pull down pictures of their, of their family and things like that. So they whitewashed their home. They pulled everything off the walls and they actually went so far as to have a white neighbor pose as the homeowner. On the new appraisal came back almost 500, 000 higher and higher than the one a year prior, which is pretty common.

Although, appraisals can fluctuate in the short term and of course, and they filed a complaint and it's settled out of court, but issues like this happen all the time. And oftentimes the average consumer may not know it. They may suspect it. They may say, Hey, that value seems artificially low. Now, in this case, it was so obvious that it was an easy slam dunk and they had the resources and they wanted to fight it and they did and they took it to court.

And there's a few other cases of that where it happens, but oftentimes we don't know it. So how can a lender, how can a credit union. Or ensure these things don't happen because there was a recent court ruling as well, that basically says you as an organization, you as a lender, if you rely on an appraisal that we know has appraisal bias, that is artificially low, and you could have, or should have known that you can be held liable.

So now some of this liability is falling on lenders, following on underwriting staff. The biggest thing you could do is number one, understand your area. Be educated. What is the typical value, a home value in this area? Number two, if you suspect something, say something. I understand appraisals are slow, and they are expensive. But if you know that something is wrong, you have to say something. Challenge the valuation.

Work with the appraiser, and if they're unwilling to work with you, and you know that this appraisal is not good, Then you have to go out and get a second one is basically what they're saying. So it's a matter of understanding and knowing. And if you see something, say something, cause bury your, burying your head in the sand is no longer going to fly. And it's unfortunate.

And it's a lot of training that needs to be done, not just in the lending industry, but in the appraisal industry and as more of these cases happen, hopefully we'll see them less and less, but as of right now, it's still a major issue that we're working with.

So that disclaimer out of the way the real estate agent industry is another big one. And this is one that really hit me. Oh, I don't know, maybe six months after the last book came out in 2022. Now I live in the upper Midwest. I live in South Dakota in the biggest community in Sioux Falls. Not a lot of, minority population, maybe 15%, but there was a major bank and I don't even remember which bank it was.

If I remembered, I wouldn't even say it, but a major bank came out with a special purpose credit program and it was designed to help people of color get into homes because of the reasons why we've already explained, because they've been denied these. Opportunities for a century or longer. And so this bank came out with a special credit program to help, black and Latinos in a certain metro area. I don't remember what metro area was.

Let's just say it was Dallas and a local realtor, a real estate agent saw that and shared the story. And they just said, this is illegal. You can't do that. And somebody knew who I was and knew what I did. And I just wrote a book on this and they forwarded it to me. They're like, Tori, look at this. What are you going to, what are you going to do? And so of course I just, Oh what's illegal about it? What law is it breaking? And it, and their response was all of them.

And I'm like, could you be more specific? And they're like there's federal laws that prevent this. And so obviously I know right off the bat, they have no idea what they're talking about. So I start actually the equal credit equal credit opportunity act, fair housing act. This is what it says. This is what you can and can't do. Here's a brief history of why we need these programs. So explain to me what's going on here. And then in the meantime.

You're friends with a lot of other people that you work with and in your profession. So this person that made the post had a lot of real estate agents that were friends and they started commenting, you can't do this, you can't do that. And it just blew up. And as I'm watching this unfold over the span of about 20 minutes, Oh, right after supper one evening, I just realized, I've been so ingrained In banking and mortgage and credit unions and just lending.

And I interviewed this person and they told me to go to this appraiser Facebook group and they said, yeah, this is a big one. They're a little bit lax on who they let in. Just fib it a little bit. And so you work in the industry, which I do, and they let me join. And this person said, you will be amazed at some of the comments that you will see in here. And I'm like, okay, I'll join. I'll monitor for a few weeks and I'll see what happens. They let me in.

And the very first post was some of the just worst, most racist crap I'd ever seen. Somebody posed a question and said, how are you using the term master bedroom? Are you still using that? Are you replacing it? Master bedroom implies, an homage to slavery. And my wife and I, we watch all the HGTV shows and we've known over the last two or three years, they don't use that term, they use primary. They stopped using it. They

And of course there was all these other just really insensitive comments, which leads me to believe. I'm like, do you understand the history that we're fighting against and the problems that we're fighting against? And when you can't acknowledge these problems. Even something as simple as terminology and the, so the appraisal industry, the lending industry, real estate agents, it's a hard problem and it's going to, it's going to be a hard one to

solve. And, at the beginning of my book I make the argument deliberately racist policies. And a lack of education got us where we are today. And by that, the racist policies implemented by the government, not allowing people of color to buy homes and the lack of education, which, I've described a lot of examples. And then at the end of the book, I talk about deliberately anti racist policies.

In other words, special purpose credit programs and loan subsidies and doing things to make sure people that cannot afford a home loan because we've discriminated against them for so long, get access. And the education piece. I don't set policy and I don't ever want to be a politician. So there's probably a little I can do on that, but I can help on the education side. And that's why I'm writing books and that's why I'm doing podcasts.

And that's why, I speak on this topic often because I feel the more people that understand these problems and the root causes of them and what it's going to take to fix them. The more actual impact we're going to have. And, one of my life goals is to see an ending to, discrimination in the lending industry. And I know that's a big lofty goal, but I'm going to do whatever I can to make a dent in that before I'm done.

So Tori, if if I haven't, if there's a question I should have asked you today that I haven't, what would that be and what would you have to say in response to it?

So at 9 AM, you can hop on Amazon, download the book for free, spend an hour and a half, spend the 30 minutes. And if it's not for you, it's not for you, but you spend the 30 minutes, you're going to be a fourth of the way through the book and you're going to start seeing, okay, there is a lot more to us, to this than, what I realized. And it's the education piece that I'm trying to do. And the more people I can get.

To understand these problems and especially in the lending industry where, I spend my time. I'm a compliance auditor by trade and I audit clients across the country to try to find these problems internally. But guess what? If we for all educated on it, we build prevention into our programs, which is what I addressed in my first book. And we don't really need auditors. We don't really need those types of things. Now That's a nice way to think about it and it may never happen.

I know, Mark, you spent your career in the regulatory industry and your company too, helps credit unions suffer through and get through their exams just the same way I do on the bank side. And there will always be a need for us and what we do, but just imagine if people were educated on these things and implemented them. Simple corrective action internally, the impact we can have on our nation.

And the last thing I want to say is when you have whole communities and whole groups of individuals that can't buy a home, let, take an entire neighborhood in any metro area. Guess what? If you don't have all these homeowners and small business owners, you're not going to collect that much in property taxes and income taxes. So what does that mean? You have less tax revenue. Which means you have less support, you have less fire, hospitals are run down, schools are run down.

So these communities become impoverished and generationally they're impoverished. Guess what? If we actually get them access to credit, get them in a home, start building equity, make sure they can go to college, make sure they can start a business, those communities will start to prosper and we will start to see poverty shrink in our country.

So whether or not you're a minority, whether or not you've been redlined, whether or not where you live, if we can solve these problems, every community will become stronger. Our country will become stronger. We'll have more revenue and everyone will prosper for it. So if that's a selfish reason and that's the only reason, then fine. Whatever reason you have to get educated and do something is going to be good enough for me at this

point.

So I read, on appraisal bias and AI, that might be my next book. I don't know, I'm trying to always learn and I learned from other people. LinkedIn is a great way to get ahold of me and share ideas.