In my last article I discussed building a spreadsheet to define each position in the origination process. From there I advised that you compare that position against each of the Fair Lending triggers. Don’t worry I’ll get you back to your spreadsheet once I have taken you through the research necessary to build your compliance management system around each of these triggers.
Evaluating Pricing Disparity Within Your Company!
The first Fair Lending trigger on our list of 10 is Pricing Disparity. It is a big one so I will talk about this in two parts. In order to build a compliance management system around Pricing Disparity, it is important to first understand its meaning and the intent of the protection.
I certainly agree that each of these triggers is going to alter the way you have always done business and the flexibility that we have always enjoyed. I also agree that it focuses less on capitalism in our industry and more on conformity. I did not make the rules; I am trying to assist you in avoiding what others have already experienced!
The first piece to pricing disparity is to understand how it works within the confines of your own product offerings. We view this as only your products offered in your markets, and at this point it has nothing to do with your Peers (that’s later).
Pricing Disparity means that two consumers who are similar in financial profile receive a different rate, APR or lender closing costs.
We know that we can charge differently based on a business justification. Unfortunately for many of you this does not mean that one loan originator wants to make more money than another originator; or is a better negotiator. Instead it has to do with actual business cost, which is backed by conclusive empirical data and tied to the reasoning for the business justification.
The next step is to evaluate your pricing policies within each MSA or as many lenders have done within each State. Either scenario will include a risk of overlap that may cause pricing disparity. An example of State overlap is Kansas City. On one side I have Kansas City Missouri and on another side Kansas City, Kansas. An MSA that overlaps may involve two scenarios. One, your company has two branches, that although they are in two different MSA’s, are in proximity to one another and loan originators from those offices do business in the other MSA. Or call centers that overlap a lot of areas. The second scenario is MSA’s that overlap into multiple states.
One of your first steps to solving pricing disparity is to take a hard look at two things.
- How do varying comp plans or varying pricing schemes alter a borrower’s rate, APR or closing costs, as compared to comp plans or pricing schemes in the same area?
- Where is your business coming from and where in the country do you have overlapping?
Once you have the details on this, you can begin to evaluate your pricing disparity risk per MSA, Overlapping MSAs or States.
Pricing Disparity Risk:
Does your company have loan originators in the same branch receiving different pricing or commission schedules that would cause one borrower to pay more than another (financial circumstances being similar)?
Does your company have branches within the same MSA that have different pricing offerings or different compensation plans that would cause two similar clients to receive dissimilar rate, APR or closing costs?
Where does your company overlap in States or MSA? Do those overlaps provide for any sort of pricing disparity?
I know this is a lot of work, but it is essential to protect yourself from several million dollar claims and settlements. After all, if and when you do receive a letter from the CFPB or DOJ it will cost your company far more to gather this information and defend it, then to think about it in the first place whether you are guilty or not!
Tomorrow I will drill down into pricing disparity even more to help you solve problematic areas.
