You’re in an exam. The examiner believes that 150 files need more information because they appear to be priced higher on a prohibited basis. Now demonstrate this and watch what happens!
- “Not a problem Mr. Examiner, let’s look up the first file and I will show you how we monitor our pricing. We use our Pricing engine to a high degree of efficiency to watch and document the file from loan lock-in through closing. Here is our workflow model that you can use to follow along as I show you the process.”
- “First, the loan originator transfers/inputs these data fields (have them prepared in advance). Then, our pricing engine reviews all of the programs that are available to the consumer from all of the programs available from the company, to the loan originator. As you can see we are able to notate and document the file from the original lock in and based on all of the data fields necessary to determine a rate.”
- “You may also notice that our originators are required to pick the lowest interest rate available to the client (price being equal) and if they cannot, they must explain why before they are allowed to lock a loan.” Show them how this is documented in the compliance checklist function.
- “Then, the secondary lock desk takes a look at the answer from the loan originator and does a quick double check to make sure that the loan originator did offer the lowest rate, and if not that they documented why.” If a pricing exception is required, the secondary lock desk notates the reason for the exception, so that any other exceptions can be tracked for consumer fairness.”
- “Next, the compliance department does a file audit based on the data points, investigates any possible issues and makes notations to the file. This is done with the fair lending software attached to our pricing engine. We choose to monitor files before they close for fairness, instead of after the loan closes. Our philosophy is that by moving the fair lending evaluation forward to the time of lock in, we catch any issues before a consumer may be harmed.”
- “Our LOS system is programmed to send our compliance department an email when the file is cleared to close. When the compliance person sees this, they do another check on the file to make sure everything is as per our pricing policies and procedures.”
- “So let’s examine this first loan and I’ll take you through our workflow. First I’ll pull up the data on this client’s file in our pricing engine. As you can see we have multiple notations on the file indicating why the client received an equal rate and price based on their personal financial criteria and as compared to similarly situated borrowers.”
- “Just to be sure, let’s also take a trip back in time to see what was available for that client on the day of lock in. To do this I’m going into my historical database and it will let me see exactly what was available for this client on that day in history. As you can see, the client received the best rate/price for their financial situation on the day they locked. As a compliance person, I can also take this one step further. Let’s do an anonymous search on the exact same financial criteria for the exact same day to see what a similarly situated borrower would have received that day. As you can see from the results, they would have received the same price and rate. I also want you to note that when a re-lock occurred on this file we have a documented chronology of the field value changes, how it affected the lock, and can even do a complete price trace. Notice how this chronology is displayed in a format where I can see the initial lock followed by all subsequent locks. The “Red” alerts me to any field value changes. Also note that I can click into the underwriting guidelines to ensure that any notations from the originator are correct per the investor guidelines.”
- “It is important to note Mr. Examiner that we look at our Fair Lending data neutrally so as not to inject any bias into the pricing. At the time of lock we have financial data and not prohibited basis data. Therefore, this type of model removes the bias from the equation and presents simply the available mortgage programs for a client with this financial profile. Throughout the entire process of the loan, we watch this lock and any re-locks in price, based only on the financial characteristics of the file. This ensures that we have a properly priced loan no matter what the age, sex, ethnicity or race of the client. We think it is the best way to make sure each client receives the best pricing available.”
- “We based our pricing off of the following data fields for all applicants. Our compliance department monitors the additional fields to ensure complete fair treatment of the client. So as you can see this client has the properly documented data points, to ensure that no discrimination in pricing occurred!”
- After you pick them up from the floor because you just wowed them……
- “Okay, so that file took just a few minutes. Let me look at the other 149 and this time it will go even faster, because you now understand our fair lending and pricing monitoring methodology.”
Now doesn’t that sound a whole lot better than getting 15 day letter, pulling a bunch of files, trying to piece them together and then trying to respond. Your pricing engine just saved a bunch of staff time and money and made you look like you have this under control. Of course, this won’t solve the Disparate Impact issues which evaluate your company’s lending as a whole, but it will go a long way to ensure that the individual consumer was treated fairly. I’ll address the Pricing Engine and Disparate Impact in another article so stay tuned!