The Fair-Lending Risks of Unmonitored TPO Pricing Discretion

Mark Gregory

Uncontrolled, unmonitored loan pricing discretion in the hands of third parties will often lead to significant fair lending problems. If discretion or exceptions are allowed, lenders should impose policies and procedures to ensure monitoring and sufficient controls detect, prevent and provide the opportunity to cure fair lending violations.

Through 2011, Provident Funding Associates allowed brokers unfettered discretion to charge higher fees and yield spread premiums to borrowers, resulting in disparities ranging from 16.9 to 58.2 basis points in fees charged to African American borrowers and up to 31.8 basis points in higher fees charged to Hispanics.

An investigation by the Consumer Financial Protection Bureau and Department of Justice, found that Provident failed to provide or impose any objective criteria or require any explanation to justify the exercise of brokers' discretion. Provident has agreed to pay $9 million after entering into a consent decree with regulators.

The CFPB did not suggest that discretion alone was in itself a fair lending violation, but only that the way it was implemented in Provident's case resulted in fair lending violations.

This case underscores the fact that wholesale lenders are responsible for fair lending across third-party organization channels and that lenders — especially those that permit discretionary pricing — must monitor for fair lending, provide limits and criteria to the exercise of that discretion and at times ask for justification supporting the exercise of such discretion.