Q: Often we make exceptions to our established credit standards (i.e. we lower a rate to match a competitor's offer and thereby retain the consumer). Is it possible that fair lending risks arise as a result of our company engaging in this activity?
A: Yes. Although reducing a rate to meet your competition's offer is permissible it is important that these types of decisions are based on a legitimate business justification and that your company maintains adequate documentation and oversight to avoid increasing your fair lending risk.
The CFPB discussed this issue in their Supervisory Highlights in the Spring of 2014. Specifically the CFPB stated:
If the applicant does not qualify for the loan applied for then the lender may counteroffer with a requirement of an additional borrower or guarantor but the lender is not permitted to require this additional borrower or guarantor to be the applicant's spouse.
"A lender may promote the availability of credit by providing credit to an applicant based on a lawful exception to the lender's credit standards when exceptions practices are complemented by an appropriate system of fair lending compliance management. A strong compliance management system can also mitigate fair lending risk related to credit exceptions by adequately documenting the basis for the credit exception, monitoring and tracking exceptions activity, and controlling any resulting fair lending risk."
Thus, any lender who makes exceptions to their credit standards must:
Fair lending risk in this regard is not just limited to credit exceptions but also lender fee reductions, discretionary lender credits and waivers of lock extension fees. All requests for these exceptions/reductions/credits should be tracked and memorialized whether granted or denied. This information will be invaluable if you need to justify pricing discrepancies to a regulator down the road.
- Memorialize written policies and procedures for pricing exceptions (when allowed) and how they must be documented.
- Monitor and Audit to make sure these policies are followed.
- Train staff on the policies (not just basic fair lending training).