The CFPB announced last week that, together with the Department of Justice (DOJ), it had entered into a proposed consent order with Provident Funding Associates, a wholesale mortgage lender, to settle charges that Provident violated the FHA and ECOA by allowing its wholesale brokers to charge higher fees to African-American and Hispanic borrowers than non-Hispanic white borrowers. The consent order requires Provident to pay $9 million in monetary relief to aggrieved borrowers.
In their joint complaint filed in a California federal court together with the proposed consent order, the CFPB and DOJ alleged that between 2006 and 2011, Provident originated loans by setting base or par rates for its various loan products. Such rates, which were listed on rate sheets provided to brokers, reflected Provident’s assessment of individual applicant creditworthiness, as well as current market interest rates and the prices Provident could obtain from investors buying the loans. Provident also published the yield spread premiums (YSP) it would pay brokers who submitted applications for loans with above par interest rates. According to the complaint, Provident’s mortgage brokers were compensated through a combination of direct borrower-paid fees and YSPs paid by Provident.
The complaint alleged that during the relevant time period, brokers had discretion to price a loan at any above par interest rate and charge any amount of direct fees, as long as total broker fees did not exceed Provident’s maximum broker compensation caps. The CFPB and DOJ contended that such discretion and other aspects of Provident’s policies, including its failure to require documentation for broker fees not based on borrower risk or adequately monitor for disparities in broker compensation, resulted in African-American and Hispanic borrowers paying higher total broker fees than white borrowers. The CFPB and DOJ claimed that the higher fees were based on borrowers’ race or national origin rather than their creditworthiness or other objective characteristics related to borrower risk and loan terms.
In addition to requiring Provident to pay $9 million into a settlement fund, the consent order establishes requirements for its broker compensation policies and procedures, including a requirement for brokers to disclose to applicants (a) the full amount of broker compensation, stated separately for lender-paid or borrower-paid fees, and that such compensation may, or may not, as appropriate, be negotiable between the broker and borrower, and (b) a specified notice of non-discrimination. The consent order also requires Provident to have a monitoring program to monitor its loans for potential disparities in broker compensation based on race or national origin. (Of course under the Regulation Z loan originator compensation rule, a broker may receive compensation from the lender or from the borrower, but not from both in the same transaction.)
The program must include portfolio-wide analyses to detect statistically different disparities on a nationwide level on a quarterly and annual basis. (For purposes of the consent order, an outcome is considered to be “statistically significant” if the probability that it could have occurred by chance is less than 5%.) Provident must also perform an analysis on a semi-annual and annual basis designed to detect such disparities in selected geographic areas on a broker-by-broker basis, with the criteria used to select such areas and brokers to be agreed upon by the CFPB, DOJ and Provident before each semi-annual analysis. The consent order details steps Provident must take if any analysis discloses significantly significant disparities.
The consent order indicates that under Provident’s current broker compensation policy, brokers cannot charge different amounts of fees to borrowers on a loan-by-loan basis because each broker (a) must periodically select its compensation level as a percentage of loan amount, up to a maximum percentage or dollar amount, (2) must charge the percentage or dollar amount it has selected to each loan application it submits to Provident during the applicable period, and (c) may not charge any other fee in connection with originating a Provident loan.
According to a section of the consent order titled “Position of Provident,” Provident has asserted that it changed its broker compensation policy in response to regulatory developments in 2010 and 2011. Such “regulatory developments” presumably include the original Regulation Z loan originator compensation rule that was adopted in 2010 and became effective in April 2011. That rule, as well as the currently effective revised rule, prohibits mortgage broker compensation that is based on the terms of a loan or a proxy for the terms of a loan. However, while such restrictions on loan originator compensation have reduced pricing variations, pricing variations continue to exist and can potentially be challenged as discriminatory. Indeed, the consent order’s monitoring requirements suggest that the government fully realizes this potential. Thus, despite being compliant with current restrictions on loan originator compensation, lenders must carefully assess any pricing variations for fair lending risk.