This is the final part of a five part series that explores issues related to discount points. The previous articles provided a primer on discount points, explored UDAAP concerns that result from unearned discount points, considered how unearned discount points could lead to fair lending violations, and provided a glimpse of how Regulation Z revisions will change the handling of discount points in the future. In this part we discuss policies, procedures and controls needed to avoid problems related to unearned discount points.
Training – Compliance staff should make senior management and directors aware of the many problems that may result from unearned discount points. Management should then ensure that residential lending staff understand the risks associated with unearned discount points. Sharing this series of articles with lending staff or developing a class based on these articles should provide sufficient background on the topic.
Policies, Procedures and Controls – The board and senior management should adopt/revise policies, procedures, and controls related to mortgage loan pricing to prevent loan officers from imposing discount points without actually lowering the rate. The pricing policy or guidelines should be specific and state that loan officers are prohibited from charging discount points that do not result in a proportional lowering of the interest rate.
Compliance Review/Audit – The board and senior management should assure that compliance review/audit procedures specifically include a review of discount points and testing to assure discount points are earned.
Conclusion – Discount points provide benefit to both lenders and borrowers. However, charging unearned discount points can result in violations of laws and regulations and increased legal and reputational risks for financial institutions. Such violations could also result in required remediation to affected borrowers and other supervisory actions, including a possible referral to the U.S. Department of Justice if there is a fair lending violation.
Proper management of this area allows your bank to enjoy the benefits of discount points without incurring any of the damage associated with unearned discount points.