I attended the program hosted by the Federal Reserve Board Joint Commission today. This is a commission of all of the regulatory bodies who update us once per quarter on fair lending issues and regulation. I found the discussion regarding Pricing Risk to be of particular importance to our clients.
We all know the world is changing, but the litigation is picking up rapidly! Here are some of the high points on Pricing Risk from today’s Webinar.
- Pricing is a Fair Lending Risk. Always has been and probably always will be!
- If Pricing is a Fair Lending Risk, then these risks have to be scrutinized and monitored, for it is pricing/rate and loan costs that will cost you chaos and heavy financial penalties for Fair Lending violations.
- Pricing Risk includes Disparities in:
- • APR
- • Fees
- • Points
- • Markups/LLPAs
- • Rate/Price Disparity
- Pricing Risk also includes:
- • Financial Incentive tied to the price of the loan
- • Pricing Discretion
- • Discretion in Setting Pricing by the Originator or TPO
- • Lack of Documentation in Granting Pricing Exceptions
- • Setting Target Pricing for Originators that Vary
- Not Monitoring your TPO’s for Pricing/Cost Disparity. This cost Plaza Funding almost $4 Million
The bottom line is this:
Remove any pricing disparity or discretion without authorization at the originator level (retail or your TPOs). If two borrowers are similarly situated and they go to your company in the same MSA or within proximity of the same MSA they should receive the same pricing/rate and cost. Period and end of story.
Set policy around all of your pricing risk. As an example when is discretion allowed? How is it monitored and documented? What training and monitoring are your TPOs under for compliance and Fair Lending? Your company is the responsible party, so thoroughness is paramount to your success in an exam!
Build a defense that is backed by congruent data in all of your systems, monitored throughout and applied fairly to all. If you have not started moving in that direction, the regulators are making it clear that now is the time. For instance, if you are not locking in OB or Locking in OB and the changing the lock in your LOS, you are causing chaos come exam time. I know this because our clients who have been down this road are correcting that process now.
If you have any questions regarding how to set your company up to minimize Fair Lending Risk, I am here to help!