Fair Lending: Underwriting Twists

Fair lending means flexible underwriting. The old standards are being scrutinized and new ideas tested. Ratios are changing. The significance of the credit report has changed. Perhaps most important are the changes in how the applicant has managed different types of credit and payment responsibilities.

One of the new twists is evaluating whether the applicant is a responsible manager of credit. This is more than looking at whether the applicant paid bills on time. It looks at how the applicant used available credit.

When evaluating whether the applicant used credit responsibly, the underwriter looks at the available credit, particularly lines of credit. The underwriter is looking for an applicant who uses credit conservatively and responsibly. The applicant who never uses the entire credit limit available is presumed to be more responsible with credit, and therefore a better credit risk, than the applicant who runs credit lines to the limit and even maintains credit at the limit.

The conservative use of credit may be more important in the underwriting decision than other criteria, or it may influence the decision in the applicant's favor.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 6, 4/96