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For several years, I’ve been warning lenders of pricing models that will likely result in enforcement action if not corrected.  Two of the most egregious “we’ve always done it this way” is the practice of shaving off incremental premium pricing on a rate directly to the company, or not applying excess lender credit completely to the borrower.  In this most recent case, the lender credits exceeded the actual closing costs, and the borrowers did not receive the full credit.

Examples given for how the lender was expected to handle excess credit were to:

  • Reduce the rate
  • Reduce the principal balance
  • Reduce the down payment
  • Provide a cash refund
  • Some Other Means

Now as lenders, we understand that there are only so many options we have when dealing with the secondary market restrictions.  Following the excerpt from the press release, are some ways that you can structure your pricing policy to avoid enforcement orders like this one.

Veteran’s United Home Loans entered into a consent order with the State of New York over unpaid lender credits to consumers.  As stated in the press release:

“The agreement stems from an examination of Veterans United that found, in at least 322 cases, that the company did not refund surplus “lender credits” to New York borrowers who had obtained from Veterans United a credit to cover estimated closing costs by agreeing to a higher interest rate (known as a “lender credit”), when the ultimate closing costs were lower than such estimated costs, (resulting in what is known as a “surplus lender credit”).   Veterans United did not adjust down the interest rate, reduce the principal balance of the loan, reduce the down payment, provide a cash refund, or pursue any other means of refunding the surplus to the borrower.

“While we appreciate Veterans United’s willingness to make its customers whole, we emphasize that lenders must not take advantage of the moving parts of the loan origination process in order to obtain hidden profits at their customers’ expense.”  Maria T. Vullo-Financial Services Superintendent-State of New York

“As part of the settlement, Veterans United will pay full restitution to all known affected consumers via check, including 9% interest, estimated restitution to consumers whose records have been lost, as well as a penalty to the State in the amount of $500,000.  Veterans United also will ensure that in the future any surplus lender credit is immediately returned to the borrower via cash payment or reduction in the principal balance of the loan.”

What Is a Lender to Do?

Often, I’m asked, “well how much is acceptable to keep versus unacceptable”?

The answer is always this:

When a client chooses a rate and the cost for that rate results in premium pricing, no matter how much, the consumer must be credited the premium.  Period and end of story.  The regulators look at it this way.  If a consumer buys a rate, they are entitled to all costs, par value or premium of the rate.

Let’s Illustrate This With an Example:

Rate Sheet Today:

4.25% Price is 99.00

4.375% Price is 100.00

4.50% Price is 101.00

4.625% Price is 102.00

If Consumer Chooses:

4.25% the consumer pays 1% to get that rate.

4.375% the consumer pays nothing because the price is Par.

4.50% the consumer receives a credit of 1.0% for premium.  All of it!

4.625% the consumer receives a credit of 2.0% for premium.  All of it!

Options for Excess Premium Pricing:

  • Cash Credit at Closing (Predicated on Product/Investor Guidelines)
  • Reduce Principal Amount (Check with your investors for how to do this)
  • Reduce the Down Payment (may or may not be possible so check with investor guidance first)
  • Reduce the Rate (this causes issues with closing and drawing docs so not a great first choice)
  • Some Other Means (would love to hear from anyone that does something else. PLEASE COMMENT)

Why Force to Par?

I always recommend the policy of forcing your pricing engine to present “par” pricing.  Some pricing engines are not keeping up with this and if yours is one of them you should push the issue or change vendors because it will cause you issues.

When you force your pricing engine to a Par price AND you have policy in place that indicates how pricing should be done, you have a much easier time of explaining to the consumer or the regulator how each of your loans were charged or credited to the consumer properly.

When you do not force to par or you “target price,” or just let everyone figure it out for themselves, you have loose pricing policy, and variations to consumers can occur.

Keep it clean and save hundreds of thousands in attorneys, legal battles, enforcement actions and further scrutiny from the Federal level like the CFPB.  Once you have State enforcement actions, you immediately end up on the “most likely to get examined” pile at the Federal level.  No one wants that!

Finally, put what you do and how you do it into your policy!  Written and concise policy keeps your practices consistent so that your staff knows what to do.  If they do not know how to apply a credit and in what order it should be done, you can’t blame them if there is no training or policy and problems occur.

Need Help with Your Pricing Structures or Policy?  You can find me at

To Read the Press Release CLICK HERE!

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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