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Question:

At times, lenders make exceptions to their established credit standards (i.e. lower a rate or fee to match a competitor’s offer and thereby retain the consumer).  Is it possible that fair lending risks arise as a result of a lender engaging in this type of activity?

Answer:

Yes.  Although reducing a rate to meet the competition’s offer is permissible, it is important that these types of decisions are based on a legitimate business justification and that the lender maintains adequate documentation and oversight to avoid increasing fair lending risk.  This would include those situations where the lender grants a pricing exception, as well as those situations where they deny a pricing exception.

A lender needs to have firm procedures with regard to pricing exception requests and handle such requests accordingly.  The CFPB discussed this issue in its Supervisory Highlights several years ago.  Specifically, the CFPB stated:  

“A lender may promote the availability of credit by providing credit to an applicant based on a lawful exception to the lender’s credit standards when exceptions practices are complemented by an appropriate system of fair lending compliance management. A strong compliance management system can also mitigate fair lending risk related to credit exceptions by adequately documenting the basis for the credit exception, monitoring and tracking exceptions activity, and controlling any resulting fair lending risk.”

Thus, any lender who makes exceptions to their credit standards should:

1. Memorialize written policies and procedures for pricing exceptions (when allowed) and how they must be documented.
2. Monitor and Audit to make sure these policies are followed.
3. Train staff on the policies (not just basic fair lending training).
4. Include pricing exceptions in the Fair Lending Analysis a lender performs to ensure there are no patterns of disparity.

Fair lending risk is not just limited to pricing exceptions, but also lender fee reductions, discretionary lender credits, and waivers of lock extension fees.  A lender should track all requests for these exceptions/reductions/credits and memorialize whether they are granted or denied.  This information will be invaluable if a lender needs to justify pricing discrepancies to a regulator down the road.