“Everyone knows what a curve is, until he has studied enough mathematics to become confused through the countless number of possible exceptions”-Felix Klein
I love this quote for how well it applies to fair lending data review. The bottom line is that our industry is full of exceptions, because we are trying to diligently meet the needs of our clients. Once upon a time we lived in a world where mortgage originators were allowed to run their business with discretion in pricing, to compete in the marketplace; and lenders didn’t need to monitor where this discretion was being distributed to. Fast forward to today, and you will see pricing discretion, concessions and exceptions at the forefront of many ECOA exams.
I generally see 3 types of pricing deviations in our industry, and these terms are used interchangeably, or defined differently depending on who you talk with. The goal is to define them in your policy so that it is specific to your company.
- Pricing Discretion is when an originator, branch manager or other executive level position is allowed a certain degree of “discretion” in pricing in order to get the loan. For instance, your policy may be that a loan originator can adjust the price by 25bps in order to compete and get a loan in the door. The manager may need to use their authority, if the discretion is above that and let’s say their discretion is 50bps; and so on up the chain. And yes, discretion when exercised, is an exception and must be tracked to ensure that exceptions are not being applied on a prohibited basis. Examiners will specifically look to see if you exercise discretion on mainly well-served clients and not as equally to under-served markets.
- Concessions are generally made by your secondary department, (although some branch and regional managers also have this authority too) and they are used to help you reduce the price/cost to get a loan in the door, or to correct an internal issue. With a concession, a company is conceding a portion of their anticipated profit for a reason. The question becomes, why is there a concession, and whether or not you have documented the concession. This too will be reviewed in a fair lending exam.
- Exceptions can be underwriting or pricing and they mean that you are granting an exception to your written policy. Are you doing this on a prohibited basis? How do you track this to ensure that exceptions are not just granted to well-served clients?
While these terms are used interchangeably; from a fair lending perspective it pretty much all means the same thing. You gave one client a discount or exception, and another similarly situated client didn’t get one or received less of one. In other words, not everyone was treated equally based solely on your written criteria for pricing or underwriting a loan. Some people got a better deal than others. Free market, right? Well, not in the eyes of those that oversee ECOA; which is the CFPB. They understand that you will need to deviate from policy from time to time, but they expect that you monitor this, in order to determine if exceptions/concessions/discretion are being given on a prohibited basis.
This is why they will ask you for a list of those exceptions/concessions/discretions, and you will need a way to monitor how they are being applied so that it does not look like you are discriminating. Finally, you will need to show them how you monitor this! Otherwise you end up with “you charged higher rates/costs to clients on a prohibited basis-i.e. minority, female, etc.”, and that can be very costly!
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