Compliance experts have long disagreed about how much, if any, discretion loan officers have in pricing loans to consumers. But a recent auto lending case should bring that debate to a close.
In a recent settlement in the auto lending arena, Toyota Motor Credit Corp., as part of its consent order, agreed to limit the pricing discretion given to dealerships to 1.25% above the buy rate for loans up to five years in duration and 1% for all other loans. Although this action pertains to the auto lending industry, there is little reason to believe the rationale for discretion should apply any differently to mortgage lending.
Having said that, lenders should consider that the threshold for discretion is likely substantially lower for mortgages, because of the aggregate monetary impact that small deviations can have on significantly larger loan amounts over longer periods of time. Nonetheless, the decision does support the fact that discretion per se is not unlawful. To avoid scrutiny, lenders should ensure such discretion is capped and only downward — in other words, regulators rarely see a legitimate reason for charging a borrower more than average, but are far more comfortable with downward adjustments. Lenders should also take pains to enact specific policies providing the criteria for using loan pricing discretion, and oversee compliance with them.
Again, in deciding whether and how much discretion a third-party originator or loan officer can utilize, a paramount concern has to be fair lending and as such, proper testing and analysis of lending patterns is always essential. Before initiating any discretionary lending practices, lenders should have their overall policy, or strategy, reviewed by competent legal counsel.
Ari Karen is a partner at Offit Kurman.
