Exceptions are part of any business and certainly the CFPB acknowledges that. However, they are concerned with when you give exceptions, for what reasons and whether or not they are given fairly. To do that, you have to have policy and monitoring. This checklist, combined with tomorrow’s checklist, will help you build your exception policy and procedures.
⃝ When an exception is made (either pricing or credit) did you thoroughly document the reason why? For instance, if a loan officer needed a pricing exception, because they were being shopped, do you have documentation to back up the other lender’s offerings? Are there notations to the file which explains the reason in enough details, that someone who did not know anything about the file, would understand it?
⃝ What is your chain of command for exception approvals? This needs to be written into your policy. If personnel are allowed discretion, then your policy should reflect those thresholds.
Are your pricing and credit exceptions low in number? If not, then you may need to re-visit your pricing, or your underwriting guidelines for systemic issues. If your normal pricing and underwriting are not competitive, and you find yourself giving many exceptions, this may trigger an issue with the fair lending examiner.
⃝ Do you monitor exceptions per entity? Each production person, production branch and line of business should be looked at and monitored for exceptions. If one is higher, why? Now I know what some of you are thinking. If one area of your MSA is getting killed by the competition because your rates are too high, what will happen if you drop them to be more competitive? Nothing, IF you drop them across the MSA. Sorry, no easy way out of that one without a rock solid business justification!
⃝ When you offer an underwriting exception, are you charging more for that risk? If so, do you apply this policy equally over all of your underwriting exceptions?
⃝ What are your corrective actions when you have an exception error or misstep? Telling the examiner you changed the way you monitor exceptions is helpful, but they are looking at how you remediated the borrower. That’s right, cash remediation! If you charged 25 basis points in price too much, because of an internal issue, then pull out the checkbook and document the re-imbursement to the client. Trust me it will cost you a lot less than a fair lending complaint.
⃝ If an examiner were to come into your office today, and ask you for the number of pricing exceptions and the number of credit exceptions as a whole and per entity, would you be able to provide that? If not, it is time to put that monitoring in place.
Tomorrow, I will finish out the exception policy checklist. As you can see, there is quite a bit of thought that needs to go into your exceptions policy and exceptions monitoring.