Interest rate is a reflection of risk, the more risk you pose to a lender the higher your interest will be. This is a widely accepted practice and has assisted lenders in rewarding those who are better credit risks than others throughout the years. However, like any pattern of practice, careful attention needs to be paid to the underlying details of why one borrower is a higher risk than another.
During the CFPB exam process great detail is being given as to how you arrived at a price for a client. The accepted defense for a file is no longer, “they were a higher risk so they have a higher interest rate”. Instead, you are being asked to prove that. If the reasons go beyond what you can prove in the “pricing overlay” risk, then you have little defense as to why someone received a higher price than another. It is important to point out that the pricing disparity for a recent Fair Lending settlement was less than 19 basis points per file. That’s not a lot, but it was big enough to the DOJ to file Fair Lending charges against that lender and it cost that lender millions of dollars.
So now the question becomes how do you prove that the rate and price charged are defensible? There are a couple of ways to do this. Your pricing engine will price your loans using the exact “pricing” adjustments from your lenders. Careful attention should be paid to the price overlays that you add, and how those pricing policies may affect protected classes. At Optimal Blue we database this for you to use for historical pricing searches. As part of the new release this month, you will be able to go back in time, to any lock date and find the exact pricing from that day, to document your lock. This “pricing trace” allows you to prove why a price was given to one borrower over another. Also, you should make it a point to instruct the loan officer to print search results and put them in the file.
Next, take a look at any other item that may cause you to “charge more for risk”. If for some reason you are not able to prove that this is applied consistently to all clients, you may want to re-think that adjustment, or talk with a Fair Lending consultant as to how that policy affects your risk. Fair Lending is about treating similarly situated borrowers similarly. Documenting what makes one loan riskier than another and applying those fairly will assist you in the Fair Lending part of your exam.