“In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing”-Theodore Roosevelt
Many lenders are trying to do the right thing in fair lending, by offering consistent pricing to all of their consumers. Unfortunately, they are forgetting to do one very important thing that can spell success or failure in an ECOA exam.
Quick Hit #8-Documenting the Borrower Decisions!
Did you know that the number one reason for pricing disparity is the decision by the borrower? In fact, these decisions can mean the difference of up to a 1% interest rate differential. Try explaining that to an examiner without proper documentation!
When we see broad statements in settlements or actions, we generally only see that a lender charged higher interest rates or costs to minority clients versus non-minority clients. On the surface, the evaluation of this seems pretty easy. However, having built technology that monitors pricing disparity for fair lending purposes, I can tell you it is highly complex if not documented well. And this my friends is precisely where your documentation can make an exam easy, or force you to pay fines.
Pricing is crazy complex! Varying investors, overlays, variances in pricing throughout the day due to market conditions, and an individual consumer’s financial profile leave disparate pricing concerns all over the place. The only way to defend your company properly is to consider the “why” behind these variations, and regression analysis does nothing to accomplish this.
Problem #1-Secondary mortgage markets rarely price to Par! This means that the start price may be 100.125 or 99.875 but not 100. Because pricing does not start at 100 every time, it may mean that one client gets a better deal than another, depending on how the lender rounds the price.
Solution #1-Force your pricing engine to present Par pricing to your origination staff! Yes, you can do that and it makes explaining your pricing methodology so much easier in an exam. This way the loan originator always sees a par price, and you can build policy around that, which can easily be demonstrated. For instance, you may force the pricing engine to present a par price. The LO sees a rate at 100 price (par). If the LO picks a rate higher than that, the client gets a credit for the increase in price. If the LO picks a rate lower than that, then the consumer pays points. (i.e.) 3.75% = 100 (Par). Borrower gets a 3.75% rate with no points. Or, borrower needs money for closing so they choose 4.00% at a price of 101 which gives them a 1% credit. Or, borrower wants to buy down their rate so they take 3.5% at a price of 99 and pay a point. Be sure to document the borrower decision!
Problem #2– Borrower does not get the lowest rate, price being equal. The examiners love the question “price being equal, did the client receive the lowest rate for their financial situation”? Seems like a reasonable question. After all, that would be fair pricing. However, we all know that sometimes a borrower cannot get the lowest rate (price being equal) for reasons like underwriting or service levels with the investor.
Solution #2– Document that! If you cannot give the borrower the lowest rate, price being equal, then you need to document why. i.e. We could not give the borrower the lowest rate because they have non-traditional credit and the only lender who would take the loan priced it at “X”. That is a legitimate reason and not something that your pricing engine would be pick up.
Problem #3-Did the originator present all viable options to the client? This is a big topic in Fair lending world. You may have seen statements by consumer advocates or the regulatory bodies which indicate that a lender gave a borrower a FHA loan, when they could have qualified for a conventional loan and paid less.
Solution #3– Seek affirmation from the originator that they presented all options to the client. This can be done at the time of pricing, or at the very least in the loan set up. Give processors and underwriters the ability to question or bump up the file to a manager, if they think there is a better option for the client. Over the years I’ve heard numerous processors or underwriters state that this isn’t the lowest cost option for a client, but since the loan officer picked it they are stuck with it. What?? If you see something say something! And managers you should encourage this. Not only will this assist the consumer and you in an exam, but it can also be used as a learning opportunity for the loan originator.
Just a little extra documentation will go a long way in proving that you treated each client fairly!
If you missed the other Quick Hit Tips in this series, they can be found on this blog.
Stay Tuned for Quick Hit Tip #9
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