To date, the predominant issues of litigation involving Disparate Impact are pricing policies. Many times this goes hand in hand with the credit overlays as well, because loan level adjustments are applied based on underwriting characteristics such as credit score and loan amount.
Written testimony of Assistant Attorney General Thomas Perez from March 7, 2012 Congressional hearing:
“Many of the Division’s pricing cases have relied, in part, on disparate impact analysis to show a violation of law. This approach has been unanimously accepted by the courts, and I have made clear that, under my leadership, the Civil Rights Division is using all of the tools in our arsenal to root out discrimination and ensure a level playing field, including utilizing both disparate treatment and disparate impact analysis when supported by the facts” (emphasis added).
So the next step in the process of evaluating your fair lending risk is to take a good look at your pricing policies.
- Loan level price adjustments AKA pricing overlays. What are they? Why are they in place? If your investor requires them, then that is reason enough since you cannot affect their pricing policy. However, if you add your own, how are you justifying the overlay of the pricing and quantifying the risk associated with that file trait?
- Pricing per MSA. Is one branch offered a different price than another? Quite a few lenders have been warned or burned with this one. Here is the problem. Let’s say office A offers an FHA loan at an interest rate of 4% and a price of 102. Office B has a different pricing structure and they offer an FHA loan at 4.125% and a price of 102 to a similarly situated client. Office B is located in a predominantly minority area, and thus a protected class borrower receives a higher rate for the same loan in the same MSA. See the issue?
- Different loan officer compensation. Do you allow your loan officers to choose their compensation level per loan type? Is it possible that they could be steering to a higher loan compensation program over another? How do you monitor that? Most lenders who have been through the exam process keep the same compensation levels, regardless of the loan type, so that no one can be accused of steering to one product or another. This assumes similar lender profit per product. As an example a bond program may pay less because you receive less. Another issue is one loan officer that is receiving better pricing than other loan officers within the same MSA. This may cause one client being charged more for a loan, than another for a similar loan.
- Price Tracing. Are you able to “price trace” your offering to the client for every loan, and document that trace? The CFPB is looking at the base price and rate offered to the loan officer, the pricing adjustments, broken out per adjustment, and how you reached the final price.
- Pricing Compliance Management System. Do you monitor for “outliers” on your live pipeline to prevent fair lending issues before the loan closes? Are you requiring file notations regarding why a program was selected, if the program selected was not “best execution”? Do you have a policy in place to check the loan prior to closing for any potential fair lending issue? If so, how do you go back to the lock date and compare the file to your offerings, on that day, to ensure the loan was within your policy range?
- Training. Is your front line trained on pricing policies, why they are important and proper file notation to prevent fair lending issues? What are your requirements for presenting available loan options to a client? An example of this issue is a loan officer that has never done a VA loan so they recommend an FHA loan, without mentioning to the client that they qualify for a VA loan. How do your policies prevent this from happening?
Stay Tuned! My final article in this series will be pricing/underwriting discretion and exceptions.