This checklist is the second part of the exceptions checklist. My goal is to help you round out the beginnings of your policy, or help you add to your existing policy. This checklist will focus more on your technology solutions for monitoring exceptions. Those of you who had the pleasure of a CFPB exam, know that how you manage exceptions and monitor them, is an important task to demonstrate.
⃝ After evaluating each entity and each loan officer separately, do you have anyone with more exceptions than others? If so, what is the reason? Do adjusts need to be made to underwriting or pricing to be more competitive? Do employees need training or oversight?
⃝ Do your policies describe permissible loan exceptions, with thresholds for each type of position. For instance, a loan officer may have less discretion than a branch manager, who has less than a regional manager, etc. Are the underwriter’s thresholds defined as well?
⃝ If exceptions are becoming normal, do you change your pricing and underwriting conditions to reflect market competiveness? Although you will never achieve “no exceptions” and stay competitive, it is wise to work toward “few exceptions”. Re-visit the reasons for exceptions frequently, and look for adjustments that should be made to policy, pricing and underwriting.
⃝ Have you documented the need for your overlays? It doesn’t work to say “those loans are more risk”. You will be asked to prove why they are more risk. If the market will buy a loan with no overlays, each overlay that you require must be justified with empirical data, that shows an increased risk, and thus the reason for a higher price. And, all of this must be applied consistently to similarly situated borrowers.
⃝ Do you have manual or discretionary overlays that are not part of your automated system? If so, why and what is your basis?
⃝ Do you deviate from automated underwriting or pricing standards? If so, are these applied consistently and how do you monitor that?
⃝ Do your employees have clear policy and procedure guidance for overriding automated systems? If you have not experienced this yet, you will soon find out that exceptions must be applied equally, between similarly situated borrowers in protected and non-protected classes.
⃝ Do you have clear policy and monitoring for credit score override decisions?
⃝ What sort of documentation/notation do you require to explain the exception?
I hope you are finding this exercise helpful. I realize that few people want to sit down, discuss all of these items and formulate policy from them. However, the more that you commitment to doing just that, the easier your exam will be and your company will face fewer financial penalties.
