Unless you are offering the exact same pricing, overlays and adjustments as your investors, you may want to pay careful attention to these questions. The goal with this “Think List” is to have a meeting with the Executive Team (Sales, Secondary, Compliance, and Operations) to ready your justifications for an exam.
_____ Make a list of every credit overlay or pricing adjustment that is different from your investor. This comparative analysis is tedious, yet important if the examiners uncover potential Disparate Impact or Redlining issues. Remember, any overlay or pricing adjustment adds risk. The key is to determine which risks are worth taking.
_____ With each credit overlay or pricing adjustment define “why” you charge or require that. At this point, you are evaluating whether or not you may be able to build a “business justification” around the requirement. If you do not know why you charge more, or have added the credit overlay, then you may want to consider eliminating it.
_____ For the overlays and adjustments that you consider to be important, begin to build out the “business justification” for them. I will warn you that this is not an easy process, and will most likely require the services of Fair Lending analyst/consultant. You are going to need much more documentation and proof, then just a reason. Business justifications that are not well documented leave your risk level very high. Your goal is to mitigate the risk with the “proof” of why you need it.
_____ Really look at your MSA. Are there areas of the MSA where you do not offer compatible products for the market? For instance, let us assume that you have a minimum credit score of 700. The investor you sell the loan to, requires a minimum credit score of 640. It just so happens that the protected class areas of you MSA have an average credit score of 680, thereby eliminating the average client from that area. You will be asked “why do you require 700 and your investor requires 640?” “That is how we have always done it”, is not the answer. Take a deep dive into your products and product diversification, to evaluate if the pricing and credit overlays cause Redlining.
_____ How educated is your front line as to “why” adjustments or credit overlays are in place? This little bit of education goes a long way. Maybe, you have to charge more on an FHA loan with a 680 credit score, because your statistics show issues with compare ratios at that level, and this puts your company in jeopardy. The higher the risk, the higher the rate/price. If so, where are the numbers to back this up?
_____ Are there other products available the will allow you more product diversification, and still provide you with the required income to produce the loan?
_____ Are there products that you have not considered, such as state bond programs that do not yield as much income but produce good will? A salaried person can make this scenario profitable for you.
As a mortgage banker, I am well aware that we are not used to thinking this way. However, with change and new regulation it helps to address your risk levels prior to an exam. The more prepared, organized and informed you are, the more likely you are to demonstrate solid lending practices to the examiner.
