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Pricing Engines Are Not Just For Pricing Anymore!

 

I’m sure you can imagine that I talk to quite a few lenders on a daily basis.  My biggest surprise is that the compliance people are not familiar with the pricing engine.  They may know it exists, and it performs pricing for the loan officers; yet how it works and how it is set up is not general knowledge.  Additionally, many rely on the LOS or closed HMDA data (which is highly unreliable) for fair lending analysis.

Some Thoughts to Ponder:

1. The pricing engine is far more than a tool to price a loan.  It is an integral part of your work flow process and can provide you with a real time compliance management system over your pricing.

2. The risk adjustments (LLPAs) are housed and distributed through the pricing engine to the originator.  If you do not know what they are, or how they are distributed how can you test for Disparate Impact issues?  Can you answer an examiners question or give them a workflow diagram for this very important part of the company?

3. Many of your pricing policies and procedures are programmed into your pricing engine.  If you have never seen them, how do you know they match what you are presenting to the examiner?

4. Branch Margins, corporate margins, or other ways the company profits from the consumer, are in the pricing engine.  If left unchecked, you may have pricing disparity issues without even knowing it.  It looks really bad and makes an examiner want to dig deeper if this information has been there all along, and compliance didn’t have a handle on it.

5. Information beyond HMDA data, which verifies why a consumer received one product over another, is documented in the pricing engine.

6. The program options that are available to the consumer are housed in the pricing engine.  If you do not have monitoring, policy and training oversight, how do you know that a consumer was offered the best program at the best price?

7. The pricing engine software functions “real time”.  If your compliance protocol is to look at fair lending after a loan has closed, it will not work in today’s regulatory environment.  That was yesterday and today we must be more sophisticated in our approach.

8. How do you know what the loan originator saw when they searched for loans?  And how is this documented?

9. How can you match your product lines to underserved areas within your MSA analysis, or build business justifications without an understanding of your product line?  How do you know what other programs may be available from the market that your company is not offering and why?

10. The fair lending exams of yesteryear are FAR different than today’s approach.  If you are doing what you have always done with the data, it might be time to re-engineer your process as well.  Part of re-engineering is understanding the pricing and how it gets to the consumer.

The entire industry must leap out of the box they are presently in and remember a few things:

•The CFPB is here to stay and they are far more serious about Fair Lending & Disparate Impact than you can possibly imagine.  This issue, by far, will cost you the most money to validate or defend.  Therefore, more resources should be directed to this area.

•The way we all “used to do it” doesn’t apply in today’s world.  If bankers, who have been under regulatory scrutiny for years, are re-engineering their processes, then that is an important warning to us.  Once your data is analyzed by the CFPB, you get a letter that gives you 15 days to respond.  If your data is not organized in such a way that you can out-data the CFPB data, then you have left your company between a rock and a hard place!

Remember this if nothing else:  The CFPB only has congressional oversight (and we know how long it takes them to do something), they do not need to refer your case to the Department of Justice and can bring action against you immediately. Which means fines per day and no one wants that!

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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