“I have a loan closing today for first-time homebuyers who didn’t really press me on pricing,” he said. “It’s been so difficult for them to complete the application and gather the documents that I knew there was no chance they were going to apply with other lenders. It’s taking them so much time and stress just to go through the process with me.
“Another loan closing today is for a real estate agent who is an investor and has done many mortgages in the past. I feel she’s going to know what the national average(for a 30-year fixed mortgage rate) is at around 6.8%. She’s well educated. And she’s older than the first-time homebuyers.”
Mike did not hesitate: “I did more pricing exceptions for the real estate agent,” he said in an interview on the day of the loan closings. His last name is being kept confidential to avoid potential retaliation.
“I don’t think the first-time homebuyers fall into any protected class. But what if they did? What if I discriminated against them by effect? In our training, there’s so much focus that we can’t do anything that would be even accidentally discriminatory.”
Despite these considerations, Mike remained focused on closing the loans that day and granted more lender-paid pricing exceptions to the real estate agent. It’s not without risk. Regulators at the Consumer Financial Protection Bureau(CFPB) have expressed growing concerns about fair lending issues associated with pricing exceptions.
“[Regulators at the CFPB] are pursuing the issue with lenders where they find disparities, and they’re looking to have lenders alter their practices to avoid pricing exception disparities in the future. It’s definitely, based on my experience, an active area for the regulatory agencies,” said David Skanderson, vice president of financial economics at Charles River Associates, a consulting firm that offers economic and financial expertise to law firms.
While regulators scrutinize lender-paid pricing exceptions, some industry players have flagged related practices. In a shrinking mortgage market, scores of retail lenders have allowed their loan officers to cut their own compensation by lying about the source of the leads, which is illegal. To gain a competitive edge on rivals, the LO passes the savings on to the borrower. But it raises thorny questions about fair lending: Who gets the better rate and who does not?
In Part II of our series on loan pricing and LO compensation, HousingWire conducted interviews with loan officers, mortgage executives and attorneys over the past two months to explore how lender-paid pricing exceptions are applied, how often lenders utilize pricing exceptions, and how closely regulators are watching it. Part I details the manipulation of LO comp by misclassifying lead sources.
Fair lending concern
To start, here’s how pricing exceptions work. Lenders usually display a “par” or “standard” price based on the borrower’s scenario, including factors such as credit score and loan program. This represents the rate charged without applying discount points or lender credits.
An exception occurs when there’s a deviation from the standard pricing. For example, a lender may lower a mortgage rate to match a competitor’s offer and retain the consumer. The price reduction can occur through lower rates or fees, or via a lender credit.
Similar to other marketplaces, lenders have the discretion to decide whether to grant discounts, how these discounts will be implemented, and which loan officers and borrowers will have access to them. But it can lead to disparities, according to industry experts.
Sources told HousingWire that pricing exceptions have become more common since mortgage rates started to climb in the first half of 2022. Most lenders engage in offering some form of discount to borrowers, they said.
“There are certainly lenders out there that essentially don’t allow exceptions at all. They have standard pricing, stick to it and actually do fairly well,” Skanderson said. “But what they do is gauge their standard pricing to stay competitive in their markets. Some lenders might set their pricing higher than competitors and that causes them to need to make more concessions.”
Some managers grant loan officers certain allowances to reduce rates, thereby eliminating the need to ask for permission for a discount, multiple sources said. This explains why Mike decided independently to grant a pricing exception to the real estate agent but not to the first-time buyers.
Usually, LOs have between 50 and 100 basis points of discounts to apply without permission, according to multiple sources.
This aligns with a report that Skanderson co-authored in 2014, which still reflects the current reality, he said. A total of 68 lenders responded to all or part of the associated survey.
“Only a minority of survey respondents grant any pricing discretion authority at all to loan originators or branch managers, and most of those who do have definite and fairly low limits on that discretion,” the report stated. “However, a few lenders allow loan officers as much as 100 basis points of discretion, and branch managers as much as 200 basis points, and one lender in the sample has no limits. Lenders who allow a wide range of discretion to front-line sales staff face a higher degree of fair lending risk that needs to be matched with appropriately diligent monitoring.”
At HouseAmerica Financial, dba California-based Mortgage Capital Partners, rates are set based on the market landscape and similar to competitors since the company is “more of a retail operation rather than a discount call center,” according to its president, Alan Pezeshkian.
“If there’s a pricing exception, it’s usually fairly minimal and we give our loan officers discretion to grant them,” Pezeshkian said. “But if the requested exception is beyond a certain point, we then need to dig deeper and understand why there is such a disparity.
“Has the other institution misquoted? Did they make a mistake? Are they just doing a bait and switch? Whenever the concession exceeds a certain threshold, we ask for either a written document or a loan estimate.”
Shannon Hoff, a senior mortgage adviser at American Pacific Mortgage (APM), said that her branch can make decisions about exceptions since it uses a profit-and-loss (P&L) business model, but APM closely monitors these actions.
Her branch only grants “small” discounts to compete with another lender or broker when the borrower has a competitive loan estimate. The size of the discount depends on the branch’s financials since “we don’t make it a habit to lose money on the loans,” Hoff said.
She said that since the market became challenging in mid-2022, her branch started to cut costs, including tech tools, office space and overhead. It also cut compensation for all LOs. Hoff added that the initiatives made her branch more competitive, so it does not need to grant pricing exceptions often.
“We all are able to ask for pricing exceptions based on being able to compete in the market with other lenders. It is never based on loan type or ECOA-protected characteristics,” Hoff said.
Mike, however, describes a different application of pricing exceptions. He often gives discounts without a borrower asking for it, if he senses they might be shopping around, and he said that documentation is not always provided.
“Many of us won’t generate a loan estimate for a quote for compliance reasons when you are just shopping with us,” he said. “We might generate a loan estimate when we create a loan in our system, when you have an offer accepted, or we’re actually going to move forward and send you your initial disclosures.”
That’s when fair lending concerns emerge. Lenders and originators are under the impression that savvier or more educated borrowers have more access to discounts while protected classes are at a disadvantage.
“Some loans are a lot harder to do than others. So, sometimes, you can get a price exception for someone who’s got better credit and might be a much easier file to work versus someone who might have credit challenges,” said a Maryland-based LO, who asked to be anonymous because he’s in between jobs.
The same LO said he does not “go back and forth like a used car salesman” in negotiating mortgage rates and pricing exceptions because it’s not good for the “relationship with borrowers.” He believes the company “should be giving you the best price the first time around.”
Prohibited practice
If LOs wish to extend their pricing exceptions beyond the typical 50 to 100 bps, lenders often require them to receive explicit approval from their managers. But some originators have raised concerns, noting that pricing exceptions are often granted arbitrarily based on the LO’s relationship with their manager or broader importance to the firm.
Top-performing LOs may receive more favorable treatment, with lenders offering additional discounts to retain high-performing sales staff in a competitive market. Lenders also consider their strategic plans for market expansion, granting more pricing exceptions to LOs in specific areas to gain market share.
Following the LO’s request, managers will decide whether to cut margins to make the deal go through. Per Regulation Z of the Truth in Lending Act, cutting the LO compensation cannot be approved since lenders cannot pay their sales force differently based on the loan term, other than the amount of credit extended.
“The numbers of pricing exceptions probably are far greater in a market like we have today than it was in 2020 or 2021, when there were just so many loans in the pipeline that people couldn’t get them done fast enough,” said Troy Garris, co-managing partner at Garris Horn LLP. “But that said, many companies are also losing money, so they’re likely resistant to giving discounts. Nevertheless, they might have to hold on to deals.’
That’s when pressures on LO compensation may emerge, Garris said.
“Companies usually say, ‘I can’t change the loan officer compensation for a concession.’ So, it’s probably more about loan officers saying, ‘My production is way down. I have a borrower who wants to get a loan from me; I have to figure out a way to get an exception. If my company won’t pay for it, I’m willing to.’ There’s pressure for sure.”
Industry sources told HousingWire that to be even more competitive on rates through pricing exceptions, many originators misclassify the source of a lead and violate the LO comp rule. This practice also picked up steam when rates started to increase, since lenders were running low on cash and didn’t want to cut their margins.
For example, an LO might reclassify a self-generated lead as a corporate-generated lead, reducing compensation from more than 100 bps down to as low as 50 bps. Self-generated leads usually command higher compensation due to the time and marketing investments made by the LO to attract the client.
“What lenders will do is, if I call the branch or regional person and say, ‘Hey, I’m going to lose this deal unless I go way beyond the threshold you’ve given me,’ they’ll say, ‘Well, Mike, you need to cut your pay and reclassify this loan as if it was generated by our corporate office,’ meaning they’ll tell me to falsify the classification when our corporate office hasn’t generated any lead for me or probably anybody else,” Mike explained.
The practice has raised concerns among competitors committed to what they believe is fair play.
Pezeshkian from HouseAmerica Financial said that, especially in the past year or two as business has shrunk, almost every deal “is kind of put up for bid.”
“We try to stay as close as possible to our published price,” Pezeshkian said. “But the reality is we’re in a business where there’s competition, and when there’s competition you have to be flexible enough to a reasonable degree to be able to do business, stay compliant, be able to make some money, and yet not have a disparate level of concessions across different segments of the market or different LOs.
“Quite honestly, we would adopt a more lenient and flexible approach to pricing exceptions if regulations allowed for commission adjustments based on revenue. I see no issue with discounts. … While I believe every owner in our industry supports the intentions behind the LO comp rule, we would all likely welcome a revision or provision that enables revenue-based payouts.
“Realistically speaking, though, that’s probably wishful thinking on my part, so hopefully the CFPB will implement stricter enforcement across all channels to put a stop to the currently widespread practice of offering commissions based on revenue.”
Meanwhile, in the wholesale side of the industry, brokers can cut their compensation by executing a borrower-paid loan.
“Wholesale is different; we are able to price out a loan either borrower paid or lender paid. If we are competing with another entity, then we can lower the compensation going borrower paid,” APM’s Hoff said. “This will lower our compensation, but we are able to keep the client. Mortgage banks offer pricing exceptions and brokers offer borrower-paid compensation, but both can be used to help with a lower cost to the rate or lower interest rate.”
‘It’s a balancing act’
Industry experts have raised alarms about the widespread manipulation of lead sources through pricing buckets, citing a lack of enforcement.
Mark McArdle, the CFPB’s assistant director of mortgage markets, said that the regulator is enforcing the LO comp rule. “Just because you don’t see[public enforcement actions] doesn’t mean we’re not looking at it,” McArdle said during this year’s Mortgage Bankers Association’s (MBA) Independent Mortgage Bankers Conference in New Orleans, according to Inside Mortgage Finance.
It’s not clear whether the manipulation of lead sources is on the regulator’s agenda. But the discretion in granting pricing exceptions undoubtedly is.
In fall 2021, the bureau issued supervisory highlightsthat reported lender violations of the Equal Credit Opportunity Act (ECOA) and Regulation B. Lenders discriminated “against African American and female borrowers in the granting of pricing exceptions based upon competitive offers from other institutions,” the document stated.
In summer 2023, CFPB’s examinations found the same issue occurring among borrowers “across a range of ECOA-protected characteristics, including race, national origin, sex, or age.”
It culminated in the CFPB issuing Matter Requiring Attention (MRA) notices to lenders. CNBC reported in December that Wells Fargo, one of the largest mortgage lenders in the U.S., was included on the MRA list. In a previous statement, the bank said it does not comment on regulatory matters but noted that “we don’t discriminate based on race, gender or age or any other protected basis.”
The bank further told HousingWire, “While we cannot comment on speculation regarding regulatory matters, Wells Fargo’s mortgage lending practices, including pricing and loan officer compensation, are compliant with all applicable laws.”
The CFPB declined to speak with HousingWire for this story.
Matt Jones, a partner at financial services law firm Mitchell Sandler LLC, expects increased enforcement related to pricing exceptions, especially in such a competitive purchase loan market.
“With respect to pricing exceptions based on competitive offers, the CFPB has said that lenders should have a policy requiring loan officers to document the fact that the customer initiated the pricing exception request,” Jones said. “Requiring customers to initiate pricing exception requests means that pricing exceptions will be more accessible to customers who are shopping around to get multiple LEs and quotes.
“I don’t think lenders or LOs are setting out to discriminate in their practices around competitive pricing exceptions,” he added. “LOs and lenders are competing for business by offering pricing exceptions, and the customers receiving those exceptions could correlate with disparities among protected classes. When you combine those disparities with a lack of oversight, inadequate policies and procedures, and a weak fair lending compliance program, there is likely going to be a fair lending issue.”
Skanderson said it all boils down to lenders needing to capitalize on the relatively few opportunities out there.
“[Lenders] often need to grant exceptions in order to be competitive in the market,” he said. “But at the same time, they need to control their exceptions and make sure that they can defend themselves if there is an inquiry related to disparities. It’s a balancing act.”
