Chris Joles of Planet Home Lending: Finding the ‘S’ in Mortgage Banking
Chris Joles is Senior Vice President and Enterprise Risk Officer with Planet Home Lending, Meriden, Conn.
If you follow ESG reporting, which examines off-balance sheet Environmental, Social and Governance (ESG) factors influencing corporate values, you’ll see “Social” sometimes criticized as being too esoteric. Those who doubt the validity of using social factors to evaluate a company’s value may be ignoring how quickly consumers can turn against a company that treats its employees badly or makes a political misstep.
Although it’s called Social, the S in ESG isn’t about social media so much as it’s about social intelligence and social responsibility. S&P Global provides a succinct definition:
How can a company manage its relationships with its workforce, the societies in which it operates, and the political environment?
Social missteps resulting in negative media attention, particularly in consumer media channels, can cause reputational damage. Consumers, particularly millennials and Gen Z want to do business with companies that treat employees fairly and contribute to society. The current political atmosphere in the United States puts companies in a bind. They’re criticized both for taking a stand and for not taking a stand on today’s hottest issues.
Mortgage-specific Social Standards
Mortgage players issuing public ESG reports, including Fannie Mae and Freddie Mac, have added industry-specific Social measurements based on the Sustainability Accounting Standards Board ESG standards for mortgage finance.
Those include data on:
- Fair lending
- Fair servicing
- Efforts of vendors working on behalf of the organization
- Diversity, equity and inclusion
- Customer communication
- MLO compensation
The SASB standards ask lenders these questions:
- How do you manage risks associated with originating mortgages to customers with low FICO scores?
- How do you manage those risks against opportunities for growth?
- What actions do you take to minimize foreclosures and mortgage modifications?
- How do you compensate MLOs?
- How does your organization ensure transparency and minimize legal risks associated with customer communications and MLO compensation?
- What techniques, including but not limited to, internal controls, monitoring of loan portfolio and disclosures to borrowers, have you implemented to ensure nondiscriminatory mortgage lending?
- How have you performed on preventing discrimination in mortgage lending?
Some of those answers readily available because companies already share them in Home Mortgage Disclosure Act (HMDA), Community Reinvestment Act (CRA) and state-level CRA-like reports. Others are novel to ESG reporting.
SASB sets the bar for “low FICO scores” at 660. Using 660 as a bright line, lenders report how many customers falling above and below the line were given certain product types (ARMs, prepayment penalties, higher rates). Another origination data set covers the weighted average LTV of loans given to minorities and to sub-660 borrowers.
On the servicing side, the question becomes how many borrowers above and below the line were associated with servicing actions (modifications, foreclosures, short sales and deeds-in-lieu).
Going Beyond the Standards
Beyond simply reporting data, ESG provides a useful framework for companies to measure current efforts to lend and service fairly, to expand homeownership to underrepresented groups and to level the homeownership playing field for all.
Fair lending has been a part of the discussion in all types of lending for many decades and is a focus of the Consumer Financial Protection Bureau (CFPB), the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, HUD and the government-sponsored enterprises.
There are countless ways for mortgage lenders to expand homeownership. The most common is to offer diverse products that expand the credit box and help overcome affordability challenges: nationwide, state and local down payment and closing cost assistance programs, non-QM, and GSE programs, like HomeReady® and HomePossible®.
A less obvious method is renovation lending, which improves the country’s aging housing stock. Renovation home loans used to improve energy efficiency have a secondary environmental benefit. Since older homes are typically less in demand and less expensive than new homes, purchase and renovation home loans give the opportunity for more people to gain a toehold in the real estate market.
Financing manufactured housing and accessory dwelling units also helps homebuyers overcome affordability challenges.
Workforce diversity, equity and inclusion (DE&I) also fall under the Social banner in ESG. The diversity, equity and inclusion SASB standards reveal the proportion of women and minorities in:
- Executive management
- Non-executive management
- All other employees
Most mortgage companies have that data readily available in their Human Resources Information System (HRIS). DE&I data in public company ESG reports provide benchmarks any lender can use to assess its progress in diversity.
While public companies have come under increasing pressure to disclose ESG metrics, private companies are not yet required to do so. However, understanding the Social standards being used to evaluate off-balance sheet factors that influence company value can provide important information to internal audiences. Whether or not an organization chooses to disclose performance, the mere act of measuring these factors will generate valuable insights.
The views and opinions expressed in this article are those of the author and do not necessarily reflect or represent the views, policy, or position of Planet Home Lending, LLC.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)