We’ve been saying it for several years now…the level of discretion allowed in loan pricing decisions can have major implications when it comes to Fair Lending. We’ve seen many banks that have taken this to heart and made changes to their underwriting guidelines/practices and others who have been a little more hesitant. Well, the Federal Reserve Bank of Kansas City recently fired a warning shot in their most recent FedConnections eAlert. It states:
One of the most common credit practices that elevates a bank’s fair lending risk profile is the allowance of discretion with pricing or underwriting decisions for consumer loans. The more discretion a bank allows its lenders, the more fair lending risk is present as inconsistent treatment between borrowers may result.
This is not to say that pricing discretion is prohibited, rather it’s something that needs to be evaluated, closely monitored and controlled. The more pricing discretion your bank allows, the more monitoring you will need to do. This is also something that your Board and Senior Management should be kept up to speed on.
For example, if lenders are not permitted to deviate from the bank’s rate sheet, loan originators pricing decisions should simply be monitored for compliance with the rate sheet. In contrast, if loan originators are permitted broad flexibility in making pricing decisions, and deviations from the rate sheet and/or underwriting criteria are frequent and for numerous reasons, more robust monitoring activities are needed. With broad discretion, credit and exception data should be collected electronically, and analyzed regularly for potential disparities on a prohibited basis.
The Federal Reserve addresses their expectations regarding pricing discretion in their 2017 Outlook Live Webinar entitled, Interagency Fair Lending Hot Topics. If you want a Plain English training solution on pricing discretion and Fair Lending as a whole, be sure to check out our 2-hour, Fair Lending webinar which is available now in our store.
Either way, we strongly encourage you to begin evaluating the level of discretion you allow at your institution and to take steps to mitigate any Fair Lending risk. Consider yourself warned!