Optimal Blue’s Melissa Leidy: Discretion or Discrimination? Lenders Face Tight Scrutiny on Pricing Concessions

Melissa Leidy is a Business Development Manager at Optimal Blue, where she leverages specialized knowledge in product and pricing engine technology to help lenders drive strategic growth and innovation. A 12-year veteran of the mortgage industry, Leidy has held roles in capital markets and mortgage insurance. She regularly volunteers as an instructor in the secondary marketing section of the national MBA School of Mortgage Banking. 

A 2015 survey by Garrett, McAuley found that roughly half of respondents were monitoring fair lending compliance of their pricing concessions as expected by regulators like the Department of Justice and Consumer Financial Protection Bureau (CFPB). While the mortgage market has shifted since 2015, challenges in navigating the waters of pricing concessions and fair lending persist and could present more risk than you think.

Melissa Leidy

In the Jan. 7, 2024, Garrett, McAuley Report, the issue resurfaced with Joe Garrett urging readers to ask their chief compliance officer: “If the CFPB came in today, are you prepared to give them a report proving that there is no disparate impact in how we grant concessions?”

“If they say yes,” he added, “don’t believe them until they can show you such a report. Also, don’t accept an answer that ‘it’s covered in your annual or even semi-annual fair lending analysis.’ That isn’t enough or soon enough.”

Garrett’s thoughts underscore the importance of real-time scrutiny of pricing concessions in maintaining a robust and ethical lending practice that treats all its customers equally.

When Discretion Is Discrimination

Lenders must be ready to defend any judgmental adjustments to the standard pricing listed on rate sheets or determined through a pricing engine. This includes knowing:

• How much discretion is given to loan officers versus others in the organization
• What kind of justifications are allowed for discretions in pricing
• How to document discretions for regulatory reporting
• How and how often to provide pricing concession oversight 

While pricing concessions are grounded in the legitimate business need to be competitive in a tumultuous market, whenever a loan officer offers your customers a pricing concession, your institution opens itself to the risk that borrowers with similar qualifications and credit risk profiles will be offered different pricing.

If those differences show favoritism to or discretion against borrowers based on their race or another prohibited basis, regulatory enforcement agencies may find your institution is in violation of the Fair Housing Act and Equal Credit Opportunity Act (ECOA).

In 2023, several banks received an official notice from the CFPB called an MRA, or Matter Requiring Attention, on problems with discounts. Loan officers at one large bank could request pricing exceptions that might lower a customer’s APR by between 25 and 75 basis points, according to reporting by CNBC.

That may be a modest estimate. The Garrett, McAuley survey findings suggested that lenders allowed loan officers as much as 100 basis points of discretion and branch managers as much as 200 basis points. Lenders allowing such a wide range of discretion to front-line sales staff face a higher degree of fair lending risk that should be matched with appropriately diligent monitoring.

Without diligent monitoring, notes the Garrett, McAuley Report, “potential issues can go undetected, resulting in more serious enforcement penalties if they ultimately are detected.”

Safeguarding Your Business

Maintaining compliance with fair lending laws when it comes to your pricing concession practices takes more than perusing and signing off on a semi-annual review.

Mortgage lenders, regardless of their size, should have defined policies and procedures in place to document when concessions are allowed and by whom, and to sufficiently explain the basis for pricing exceptions and the specific circumstances of each exception.

There needs to be adequate staff training around regulatory requirements and real-time monitoring and auditing of compliance with pricing exceptions policy and procedures.

Should an anomaly in pricing concessions be detected, the lender should take swift corrective action and inform leadership of the oversight and associated risk.

The Garrett, McAuley Report provided practical suggestions for mortgage originators to stay compliant. These included:

Analyzing price concession reports weekly: Regularly review and analyze the pricing concession report to identify any patterns or discrepancies that may indicate disparate impact.
Drafting a monthly memo to management: Prepare a monthly memo for management explaining why there has been no disparate impact observed, ensuring transparency and accountability.
Reviewing price concessions granted and denied: Scrutinize both granted and denied price concessions to borrowers, ensuring consistency and fairness in the lending process.

Using Technology to Improve Oversight

To proactively address fair lending risks, mortgage originators must be able to capture price concessions effectively. Historically, loan officers have submitted price concession requests through various channels, such as phone calls and emails. Subsequently, the approver would track these concessions in an Excel spreadsheet before manually entering the details into the loan origination system.

Usually, only the loan number, granted price concessions, and perhaps a brief reason are documented. However, the comprehensive details of the loan are integral for adherence to fair lending standards.

To address this gap and simultaneously enhance efficiency with real-time monitoring capabilities and analytical prowess, lenders need technology that captures essential loan details in addition to the nuanced aspects of price concessions. This holistic approach ensures that all pertinent information is readily available for auditing, contributing to a thorough and compliant assessment.

Protecting Your Bottom Line and Reputation

The key to mitigating the fair lending risk associated with discretionary pricing is for lenders to maintain a robust system for controlling, managing and monitoring discretionary pricing.

With real-time monitoring capabilities built into their technology stack, lenders can proactively manage and analyze price concessions as they occur, eliminating the need for external spreadsheets and providing a centralized repository of comprehensive loan and concession data.

This seamless integration would not only bolster operational efficiency but fortify the ability to respond promptly to fair lending inquiries and conduct thorough analyses in real time.

In this way, lenders can treat customers fairly while maintaining appropriate control over their systems and monitoring. And should the CFPB ask for your pricing exception data, you’ll be ready to prove your case every time.

When it comes to pricing concessions, you should have the details you need at your fingertips and be ready to respond to any regulatory request with confidence of having a favorable outcome.

(Views expressed in this article do not necessarily reflect policies 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 Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)