Compete, But Compete Fairly: Pricing Exceptions In An Increasing Rate Environment
It’s beginning to look a lot like 2018 for the mortgage industry — rate-term refinance volume is on a sharp decline, margins are decreasing, and the Federal Reserve just raised rates for the first time since 2018, with six more increases in play for 2022. Mortgage lenders today are being forced to compete more and more to win business, and just like the industry saw in 2018, pricing exceptions are becoming more frequent.
While many aspects of today’s mortgage market feel like 2018, there is one big difference — the regulatory environment. Specifically, today’s CFPB is quite different from the 2018 version, and the CFPB’s Fall 2021 Supervisory Highlights put the industry on notice that the CFPB is paying close attention to pricing exceptions in the context of fair lending.[1]
When Do Pricing Exceptions Cause Unlawful Disparities?
It is a good time for lenders to revisit their policies and procedures for pricing exceptions and to do so with an eye toward the Fall 2021 highlights issued on December 8, 2021. In those highlights, the CFPB noted that its examiners had observed mortgage lenders violating ECOA and Reg B “by discriminating against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions.” CFPB examiners found the following deficiencies which contributed to pricing disparities:
Loan officers did not follow lenders’ policies and procedures with respect to pricing exceptions for competitive offers.
Lenders lacked oversight and control over their loan officers’ use of competitive pricing exceptions.
Management did not take corrective action in response to self-identified risks.
More specifically, the targeted lenders did not address in their policies and procedures the circumstances in which a loan officer could provide pricing exceptions in response to competitive offers. In at least one lender’s case, management implemented a verbal policy that a consumer must initiate or request a competitor price match exception before a pricing exception would be granted. Loan officers ignored that verbal policy and gave competitive pricing exceptions to non-Hispanic white and male borrowers with no evidence that those borrowers ever initiated or requested an exception. Finally, the lenders failed to retain sufficient documentation related to their pricing exceptions, and to make matters worse, management did not take corrective action to improve that lack of documentation even though the deficiency was flagged internally.
All of this culminated in statistically significant disparities concerning pricing exceptions for African American and female applicants compared to similarly situated non-Hispanic white and male borrowers.
How To Monitor Pricing Exceptions
So, does this mean lenders should not grant pricing exceptions based on competitive offers? No, and in fact the CFPB encourages competition in the marketplace because competition benefits consumers, and competitive pricing exceptions are consistent with that goal.
But, this does mean that lenders need to be mindful of their practices and data around pricing exceptions. As the industry moves into an increasingly competitive environment with more pricing exceptions, lenders should consider taking the following steps:
Ensure policies and procedures for pricing exceptions are written and followed.
Train and retrain loan production and secondary personnel on the Company’s pricing exceptions policies and procedures.
Document in a detailed fashion the rationale for every pricing exception.
Minimize the amount of discretion that can be applied when considering a pricing exception.
Monitor pricing data for potential fair lending risk.
Be proactive and consider tactical risk mitigation activities today that can be referenced in a future fair lending examination or investigation.
If you need help reviewing your pricing policies or procedures for fair lending compliance or have any other questions about compliance with consumer financial protection laws, please do not hesitate to contact our legal team.
About The Author
Matt Jones is an attorney at Mitchell Sandler with extensive experience advising mortgage lenders and other consumer finance companies in a variety of regulatory compliance, enforcement, and litigation matters. Connect with Matt Jones
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