Avoid Fair Lending Risk! Track Pricing Exceptions

12/13/2017 - By Jennifer Paradise, CRCM

The tracking and monitoring of pricing exceptions has long been an expectation of financial institution regulators. The CFPB’s 2014 Spring Supervisory Highlights specifically states that institutions should have “policies and procedures that require, for each applicant offered an underwriting, pricing or other exception, documentation appropriate to that specific exception that is, at a minimum, sufficient to effectively monitor compliance with the exceptions policies.”  As it relates to monitoring, the authors go on to state that institutions should “ensure regular monitoring of compliance with all exceptions policies” and “conduct periodic audits for compliance with all policies and procedures relevant to granting exceptions, and to test for fair lending risk”. 

The ideal exception tracking system should include, at a minimum, information such as: the borrower name, loan number, loan date, loan officer, loan type, pricing according to the rate sheet, pricing granted, and justification for the exception.  Additionally it should include Government Monitoring Information (GMI) that was collected, as applicable, along with the census tract.  

It is our experience at Saltmarsh that institutions often fail to conduct periodic audits for fair lending compliance, including adequate testing to identify fair lending risk. Capturing the information described above allows the tracking report to be easily compared to originated loans on the institution’s Home Mortgage Disclosure Act’s Loan Application Register (HMDA LAR) in order to identify any potential pricing disparities based on ethnicity, race, gender and geographic location.

Because loan pricing is a fair lending risk indicator, examiners will assuredly request to see your institution’s policies and procedures related to the tracking and monitoring of exceptions.  The Fair Lending Scope and Conclusions Memorandum in the FDIC Compliance Examination Manual specifically asks "Does the bank track and monitor loan and pricing exceptions?” If you are not already tracking and monitoring these exceptions, you may want to consider implementing procedures to doing so.

If you have any questions or concerns about these or other issues, email me or any member of our Financial Institutions Consulting Team.

About the Author | Jennifer Paradise, CRCM

Jennifer is a consultant in the Financial Institutions Advisory Group at Saltmarsh, Cleaveland & Gund and has been serving the financial institutions industry since 1990. She is primarily involved in performing fair lending, loan internal audit, loan compliance, and other consulting services for the firm's financial institution clients throughout the region. 

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