Peoples Bank of Lawrence, Kansas was issued a consent order by the Federal Reserve for UDAAP violations regarding discount points and pricing. Many lenders believe that actual pricing policies will not be revealed by the regulators and as long as their written policy tells the story the regulator wants to hear, versus what is really happening. The reality is that with the new HMDA data being collected in combination with newer diagnostic technologies, it is likely your practices are about to become highly exposed. I’m talking about stripped down to the bare bones where nothing can be hidden. This is especially true in the areas of UDAAP, and Pricing Disparity.
Take the time this year to perform a deep dive into how your pricing and mark-up flows really work. I’m always amazed by the disconnect between compliance/risk management and secondary when it comes to pricing engine configuration. If compliance cannot perform and thoroughly understand a price trace from the inception of raw pricing through the presentation of pricing to the consumer, they are leaving an area of their company more highly exposed than probably any other area.
As experts in pricing and compliance, our team is ready to help you avoid regulatory issues. Contact me at firstname.lastname@example.org.
Lessons From the People’s Bank Consent Order:
Discount Points must be Bona Fide: Discount points are not a way to earn extra income for the company. If you are going to allow discount points, then you must be able to demonstrate to an examiner how those basis points are applied to achieve an actual discounted rate. This should be done as dollar for dollar adjustment, to lower a rate from the actual rate that day to the discounted rate. Compliance folks if you are reading this and have no idea what I just said, it is time to get educated about the actual pricing within your company. Trust me when I say you do not want your secondary team discussing this with the examiner. You need to handle this discussion.
No Written Policy on Discount Points: Are discount points part of the discussion in your pricing policy? If not, you need to add that now. You should also denote how discount points are applied and how you monitor this practice, to make sure that the borrower received the full benefit of the discount when discount points are paid.
Lack of Discount Point Methodology & Proof: The concept of “bona fide” discount is quite simple, but we try to make it complex. The examiner will review what would have been available to the borrower that day, factor in the % of discount points applied and test your math to see if that makes sense. They will likely do this on individual files and collectively to see if the methodology is sound. New technology allows your math to be tested and the collection of new pricing data for HMDA will also allow for better quantitative testing.
The Review Period Was Extensive: The files tested for UDAAP violations on discount points included over 4 years worth of file data! What testing do you have in place to test this year’s data and previous year’s data? If you did have issues several years ago, then be prepared to show how you caught the problem, corrected the problem and made incremental improvements over time. You may also need to demonstrate that when errors were found you remediated the file by providing the appropriate restitution to the borrower.
Restitution and Remediation are Expensive: Peoples is not a big institution. 2.8 million dollars, attorney fees, consulting, auditor fees, and further restitution requirements to the consumers affected will mean a big hit to their bottom line; in addition to the reputational damage in the community and being under a more watchful eye from their regulator. The key is to get your practices and monitoring in place to avoid these issues! Imagine if you are a large mortgage lender and this issue hit you! The monetary implications are staggering.
If you would like to read the consent order, CLICK HERE!