“It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward.” ― Louis Sachar
In my previous posting I introduced the Incremental Progress Series where I will give you 10 quick hit fixes that will help you add to, or jump start your Fair Lending Program! Today is the first Quick Hit Tip!
Compliance and secondary marketing are on the same team and should be playing that way to achieve Fair Lending Nirvana! I’ve had countless conversations with compliance officers who have no idea how their pricing engine is configured. My first question is “How do you know that what is in your policy, matches the way you have configured the system, which delivers pricing to your origination staff?” No one wants to find out from the examiner that your pricing to your origination staff contradicts the policies that you have written.
Quick Hit #1-Understand Your Pricing Engine
If your company does a decent amount of mortgage business, you likely use a pricing engine. Here are the basics that all fair lending compliance professionals should understand.
- How are the branch margins and corporate margins configured? Does this affect the pricing to the consumer which may cause pricing disparity?
- What are the loan originator compensation plans and pricing configurations per branch?
- Is the system configured to present a “Par” price to the originator? Pricing engines will allow you to force a “par” price to the originator, and then policy can be set as to what happens to “above par” credits and “below par” deficits. This can then be easily spot checked to ensure that credit is given when required by pricing policy.
- How are the exceptions and concessions tracked in the pricing engine; and how can you use that data to monitor fair application of exceptions to the entire spectrum of borrowers? The regulators are pretty hard core about this issue. If an originator exercised discretion, secondary waived a fee or lowered a rate for competitive purposes, etc., then you will need to demonstrate how these exceptions/concessions are given fairly and equally to well-served and under-served clients.
- How do you access the historical pricing data to see what was available to the consumer at any particular time in history?
- How can you use the pricing engine to demonstrate consistent pricing and application of your policies for all channels of your business? For instance, retail, call center, wholesale, or correspondent.
- Did secondary configure any overlays to the pricing received from the investors, that are not pass-throughs from the investor? If so, what are they, as you will likely need business justifications for those.
- How is the base rate determined, and how can you access the pricing trace for any loan? A simplistic example is: a raw price is received from the investor, then margin is added at the corporate and branch level, which translates to an adjusted price. From there, situational overlays are configured based on the risk parameters of the client, which results in the final rate/price.
Having talked through this process with hundreds of lenders and their compliance and secondary departments, I’m going to bet that you find a few surprises! With this little bit of knowledge, you can create the policy that matches the practice and become more prepared for an exam!
Stay Tuned for Quick Hit #2!