Pricing discretion and underwriting discretion are deviations from your written policies and procedures. We all know that allowing them helps us to remain timely, fair and competitive. The issue is that the CFPB is looking closely at those discretions, and how they are applied to protected classes for Fair Lending. It’s a good thing Countrywide didn’t have that level of scrutiny, or all of Congress would have been under the radar screen!
As Executive Management you are charged with doing three things.
- Building walls (policies and procedures) around the degree to which discretion may occur.
- Providing a chain of command for discretion approval.
- Monitoring those discretions.
Degree of Discretion
If you allow pricing or underwriting discretion at the loan originator or underwriting level, define in your policies and procedures the acceptable range and criteria for this discretion. For instance, if you allow 25bps in price discretion for the loan originator, up to one time per month, you can configure this in your pricing engine. You can also build into the compliance checklist the reason for the exception, and confirmation of back-up documentation, before allowing the loan originator to proceed to the lock screen. This builds in a notation feature, that helps you document when and why an exception is needed.
Underwriting is an art in addition to a science. If underwriters are allowed to make exceptions to the policies, build into your policies the ability to accept loans outside of range, provided other criteria are met. For instance, if the DTI is 2% above the accepted threshold, and the borrower meets 2 of the 3 acceptable criteria from a list, then you can allow for exception to your policy. As an example, let us say that the consumer has a stable employment history of 2 years or more, and their payment increase is less than a 10% increase differential, from their previous house payment. If this is part of your policy, then underwriting discretion was made based on the financial details of the file, and not the class of the borrower. Policies like this confine the level of discretion, and force discretion outside of those policies to the appropriate manager.
Chain of Command
Building an approval process for any deviation from your policy allows the transfer of risk to move to a more appropriate level. Once again, it is important to communicate the chain of command to your employees and act in a timely manner. Not acting in a timely manner, can hurt your production and provide a bad experience for the consumer.
Monitoring and Documenting Discretions
If your company policy allows for discretion, then you are going to need to monitor this for Fair Lending purposes. Your reports need to show that you are applying discretion fairly to all classes of borrowers. Additionally, you will have to become documentation Kings and Queens. For each exception, it is important to have as much back up data as possible. Some suggestions that I have been given are, written offers from other lenders, emails from other lenders, advertisements from other lenders or any other document that can establish a paper trail as evidence. Some lenders are taking it one step further and asking the consumer to sign a statement of fact, regarding their offer from another lender.
For Fair Lending purposes look at your level of discretion based on protected classes, versus non-protected classes. If it is unbalanced it may cause you a Fair Lending issue if not properly documented.