This is the third part of a five part series that explores issues related to discount points. The previous article explored UDAAP concerns resulting from unearned discount points. This article considers how unearned discount points may result in fair lending violations.
Almost any lending practice may result in an disparate impact violation under the Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, and the Fair Housing Act (FHA). Charging unearned discount points is one example of this potential problem.
- Regulation B prohibits discrimination against an applicant on a prohibited basis regarding any aspect of a credit transaction. Prohibited bases include race, color, religion, national origin, sex, marital status, age, receipt of public assistance, or exercising rights under the Consumer Credit Protection Act.
- The FHA prohibits discrimination in residential real estate transactions because of race, color, religion, national origin, sex, handicap, or familial status.
A practice may have a discriminatory effect because it has a disproportionately negative impact on a prohibited basis, even though the lender has no intent to discriminate and the practice appears neutral on its face, unless the lender’s practice meets a legitimate business need that cannot reasonably be achieved by means that are less disparate in their impact.
When a lender provides its loan officers discretion in setting interest rates and discount points a problem may exist if in some cases loan officers charge discount points without a commensurate reduction in the interest rate. For example, a violation may exist if a statistical analysis of borrowers reveals that the practice had a disparate impact on female borrowers. Assume the examiner reviewed a sample of 50 female and 50 male borrowers and found 20 female borrowers paid unearned discount points (40 percent) and 10 male borrower paid unearned discount points (20 percent). The difference (40 percent compared to 20 percent) is statistically significant.
Unless the lender can provide a legitimate business justification for the disparity, the practice results a pattern or practice of credit discrimination in violation of the FHA, the ECOA, and Regulation B. This type of violation is referred to the U.S. Department of Justice.
Conclusion – The issue of unearned discount points is a problem on the rise. A few simple steps help assure this issue does not become a fair lending problem.
- Make sure your pricing policy or guidelines are specific and state that loan officers are prohibited from charging discount points that do not result in a proportional lowering of the interest rate.
- Create controls to assure, before closing, that any discount points are earned.
- Make sure audit/compliance review procedures specifically require testing to assure discount points are earned.
- If any unearned discount points are detected conduct sampling to assure there is no discriminatory impact.