For many, including examiners and statisticians, getting to the bottom line as to why one loan was priced one way and one another way is a daunting task.
Many times, examiners are working with limited data sets and using speculation as a means to render a guilty or non-guilty verdict. This leaves the lender at an extreme disadvantage and can cost millions of dollars in fines, where no true disparity actually exists. The messier you are in explaining your methodology to the non-secondary person, may have a direct effect on the outcome of your exam.
All mortgage lenders are under the fair lending microscope and the better that you can communicate to an examiner, how your company prices, the better off you are in the exam. Most examiners are not pricing experts. Your job is to make them an expert in your world by outlining your Compliance Management System over pricing and demonstrating best practices in a simple to understand format. Waiting on them to learn it, or expecting them to understand all of the secondary marketing jargon, just leaves you vulnerable to their interpretations and assumptions.
I’m going to outline the basics of this conversation in a two-part series with the examiner audience in mind.
Part One:
1. The first item to review is to describe where your money comes from for a mortgage transaction, and what that flow looks like? A quick process flow visual, makes explaining this much easier. Lenders are configured differently even though those outside the industry try to put us in 3 boxes (Broker, Correspondent, or Lender). This visual serves to show how your business is configured.
2. Next, I would introduce them to how you use a pricing engine and how it helps you lock down disparity.
Some examples of this are:
*Pricing policy can be configured and the types of policies you can lock down.
*Exceptions can be tracked and monitored.
*Reports can be pulled to search for pricing disparity between branches and LOs.
*Rate distribution and pricing controls can be put in place.
*Locks have to go through a lock desk to verify compliance with your policy before a loan is locked.
*Re-Locks are tracked and field values changes are archived.
*Historical research and real time fair lending is performed.
3. Tell them about your pricing policy. Do you price the same per state, branch, MSA, etc.
4. Talk about how you determine your LLPAs, how they are applied and any risk overlays that you have added to the investors. If you have overlays, be prepared for a business justification for that overlay.
5. Finally discuss your distribution methods to retail, wholesale, branches, LO, etc.
Remember, the more that you visualize the process, the easier it will be understood! Having this information ready is essential to an exam, yet it also makes a great employee onboarding tool as well.
Tomorrow: In part two, I’ll go through explaining the addition and subtraction that gets your company from raw pricing to market pricing in a “simple to understand” manner.
