Why Haven’t Loan Officers Been Told These Facts?
Pricing Exceptions = More Regulation B Violations
Excerpted from the CFPB 2023 Summer Supervisory Highlights
In the Fall 2021 issue of Supervisory Highlights, the CFPB discussed findings that mortgage lenders violated ECOA and Regulation B by discriminating against African American and female borrowers in granting pricing exceptions based upon competitive offers from other institutions.
Since then, Supervision has conducted additional examinations assessing mortgage lenders’ compliance with ECOA and Regulation B concerning the granting of pricing exceptions based on competitive offers from other institutions.
The CFPB again found that mortgage lenders violated ECOA and Regulation B by discriminating in granting pricing exceptions across a range of ECOA-protected characteristics, including race, national origin, sex, or age.
Examiners observed that lenders maintained policies and procedures that permitted pricing exceptions to consumers, including pricing exceptions for competitive offers. Generally, a pricing exception is when a lender makes exceptions to its established credit standards. For example, a lender may lower a rate to match a competitor’s offer and retain the consumer.
Examiners identified lenders with statistically significant disparities for the incidence of pricing exceptions at differential rates on a prohibited basis compared to similarly situated borrowers.
Contributing to the observed disparities in the incidence of granting pricing exceptions
- Weaknesses in the lenders’ policies and procedures concerning pricing exceptions for competitive offers
- The failure of mortgage loan officers to follow those policies and procedures
- The lenders’ lack of oversight and control over their mortgage loan officers’ discretion in connection with and use of such exceptions
Examiners did not identify evidence of legitimate, non-discriminatory reasons that explained the disparities observed in the statistical analysis. In several instances, examiners identified policies and procedures that were not designed to effectively mitigate ECOA and Regulation B violations or manage associated risks of harm to consumers.
Some policies permitted mortgage loan officers to request a pricing exception by submitting a request into the loan origination system without appropriate documentation. While those requests were subject to managerial review, there were no guidelines for the bases for approval or denial of the exception request or the exception amount.
Other policies had limited documentation requirements—and sometimes no documentation requirements for pricing exceptions below a certain threshold. This policy meant that the lenders could not effectively monitor whether the consumer initiated the pricing exception request or the request was in response to a competitive offer.
Other policies granted pricing exception authority up to certain thresholds without the need for competitive offer documentation or management approval. As a result, the lenders did not flag those discretionary discounts as pricing exceptions and did not monitor them.
Some policies had more robust documentation and approval requirements. But those institutions did not effectively monitor interactions between loan officers and consumers to ensure policy compliance, and the loan officer was not coaching certain consumers and not others regarding the competitive match process.
In other instances, examiners determined that loan officers were not properly documenting the initiation source of the concession request, nor were they retaining and documenting competitors’ pricing information in borrowers’ files as required by the lender policy.
Examiners also identified weaknesses in training programs. Some lenders did not have training that explicitly addressed fair lending risks associated with pricing exceptions, including the risks of providing different levels of assistance to customers, on prohibited bases, in connection with a customer’s request for a price exception. Other training programs did not cover pricing exception risk for employees with discretionary pricing authority.
Finally, examiners concluded that management and board oversight at lenders was insufficient to identify and address the risk of consumer harm from the lender’s pricing exceptions practices. Similarly, examiners observed that some lenders failed to take corrective action based on their statistical observations of disparities in pricing exceptions. Some lenders failed to document whether additional investigation into observed disparities was warranted, review the causes of such disparities, or consider actions that might reduce such disparities.
In response to these findings, the CFPB directed lenders to, among other things: enhance or implement pricing exception policies and procedures to mitigate fair lending risks, including enhancing documentation standards and requiring clear exception criteria.
See the LOSJ Volume 2 Issue 16, Do White Guys Get Better Mortgage Pricing Than Non-White Guys and Women? The CFPB Identifies Patterns of Uneven Pricing Exceptions Along Protected Class Lines.
Do you have a great value proposition you’d like to get in front of thousands of loan officers? Are you looking for talent?
BEHIND THE SCENES
Banking Regulators Propose Regulations Raising Reserve Requirements
More Credit Tightening
Hold onto your hats—this could be a fight. Recently proposed banking regulations should smoke out a few banking shills. Federal regulators have proposed a new capital risk management rule that significantly ups the ante for depository lending institutions.
For those unfamiliar with the federal rule-making processes, it can be mighty difficult for Congress to overturn regulations. For that reason, stakeholders, including members of Congress, will try to undermine or otherwise derail any regulatory proposal which upsets powerful special interests – such as the banking industry.
“The capuchin monkeys are readily identified as the “organ grinder” monkey and have been used in many movies and television shows. The capuchin is considered to be the most intelligent New World monkey. Easily recognized as the “organ grinder” or “greyhound jockey” monkeys, capuchins are sometimes kept as exotic pets. Sometimes they plunder fields and crops and are seen as troublesome by nearby human populations.”
Sound familiar? Uncharitable though it may be, the Capuchin monkey description could characterize some of our politicians and their relationships with special interests.
Shills and Capuchin Monkeys
Watch for a few sharp yanks on the Capuchinninny’s leash as powerful bankers foresee their shrinking margins and call their Congressional pets to perform.
God bless Director Chopra and his work to protect consumers and promote equity in financial services. The spectacle of the Washington regulatory establishment going toe-to-toe with the world’s biggest banks might be entertaining. Keep an eye on this emerging conflict. Keep an eye out for the bank shills.
However, one has to wonder about the timing of this change. The Feds are scared about bank failures. The Feds are befuddled about how to fix what they’ve done to ruin affordable housing. They are caught between a rock and a hard place, as they say. With mortgage costs through the roof, a broad increase in the cost of capital may not be what the housing industry needs right now.
One might say, “Well, I don’t work with these banks, so it won’t affect me.” Not true. Consider how a snowball rolls down the mountain, eventually stirring up an avalanche. Prices increase with less competition for credit products. Add to that the increasingly expensive money. Consequently, with less capital to work with, the lenders can ill-afford non-performing loans. Accordingly, tighter underwriting standards are necessary for lenders to reduce their non-performing loan risk.
July 27, 2023 statement (excerpts) of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, Regarding the Proposal to Strengthen the Resilience of America’s Largest Banks
“To ensure a smooth transition to the new requirements, owners of these banks would be effectively given four years to increase their skin in the game to the new required levels.”
“The proposed rule would increase the binding capital requirements by roughly 20% for Wall Street banks, 14% for large foreign banks in the U.S., and 6% for U.S. domestic systemically important banks.”
What Does Binding Capital Mean?
Capital management and risk management are foremost prudential regulatory concerns. The Feds want to avoid another great recession or worse. “Binding capital” parallels residential mortgage credit policy facets—for example, minimum borrower contribution and reserve requirements. But unlike mortgage reserves that the borrower can take to Vegas after closing or, post-closing, get a HELOC to go party with, binding capital is like a self-managed escrow account. The banks must maintain these reserves apart from working capital or face regulatory noncompliance.
The binding requirement will vary depending on the types of capital and assets the bank holds. Typically, a bank aims to hold enough capital to stay well above whatever amount the binding capital rule requires. These rules are generally articulated in ratios. Banks must consider whichever requirement is binding in all their actions. Generally, the binding requirement is the regulatory requirement that costs the bank the most to hold. The binding capital requirement is the most burdensome one. The big banks are not going to like this at all. On the other hand, the rule could reduce competition.
Director Chopra Keeping It Real
“The owners of these large financial firms simply need to put more of their own money at risk, rather than relying so heavily on other people’s money. This makes them less likely to fail and reduces the risk of contagion throughout the financial system.”
“Of course, regulators understand that no bank wants to face higher capital requirements. Particularly for top executives of the largest banks, higher capital makes it a bit more difficult to generate bigger bonuses and send more cash out the door to shareholders. But right now, those bonuses and shareholder payouts are essentially subsidized by the public, and this simply can’t continue.”
Tip of the Week- Do not rely on dated copies of the Complete VA Lenders Handbook
Use the individual chapter links to ensure you get the most current requirements
Get the Chapter links from the VA Lenders page, VA Pamphlet 26-7
JULY 27, 2023
The purpose of this communication is to announce that the Lenders Handbook – Complete link will be removed from our website on or after July 28 as we make updates to ensure the document is updated and accessible to all stakeholders.
Individual chapters of the VA Lenders Handbook will still be available for viewing and downloading on our website https://benefits.va.gov/warms/pam26_7.asp.
Action: Lenders should immediately start using the individual chapter links when referencing the VA Lenders Handbook, 26-7.
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