"Pricing discretion" means any judgmental adjustments to standard pricing to a borrower, as listed on rate sheets or given by a pricing engine. Anytime there can be pricing discretions allowed in a Lender’s business practice, there will be a heightened risk of Fair Lending violations. Managing this risk has become increasingly important since numerous fines have been levied by the Department of Justice for discretionary pricing that was deemed to discriminate against race and ethnicity or their practices caused disparate impacts on minority borrowers.
The CFPB stated that “A lender may promote the availability of credit by providing credit to an applicant based on a lawful exception … when exceptions practices are complemented by an appropriate system of fair lending compliance management.” The CFPB recommends the following to be present if discretionary pricing is used:
- Policies/procedures defining the circumstances under which exceptions are allowed;
- Documentation sufficient to explain the basis for, and the specific circumstances of, each exception;
- Record retention;
- Staff training;
- Monitoring/auditing of compliance with policies & procedures;
- Corrective action, when appropriate;
- Management and/or board of directors’ oversight of the risk associated with exceptions.
The most common scenarios for legitimate business practices for the use of discretionary pricing include the following:
- Meet a competitive offer;
- Renegotiation after rate lock;
- Address customer service issue or operational error;
- Needed to avoid High Cost Loan;
- Change in loan parameters after lock;
- Borrower needed closing cost assistance;
- Needed to meet Net Tangible Benefit test.
It’s very important to document any pricing discretion by acknowledging the presence of the adjustment, the amount of the adjustment, reason for the adjustment, and who approved the adjustment (levels of authority should be spelled out in policies and procedures). Managing the Fair lending Risk caused by discretionary pricing can be too cumbersome and time consuming without the help of automated systems to document and report on the specific circumstances.
Mortech's mortgage pricing engine has built in compliance checks to help you document and manage Fair Lending Risk. Find the perfect loan pricing and eligibility solution for your buisness.