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I’ve been asked this question by many lenders, so I thought I would post my response for everyone to think about.

If there is no “par” price, what do we do?

The CFPB does not tell you that you have to have a Par price; which is a great thing since pricing rarely works that way.  However, decisions need to be made as to how you will price, given the new regulation.

Your next question might be, so who is doing what?  Honestly, I see practices all over the board which tells me there is a lot of confusion!

So, here is my take: (With the assumption that you are setting your own rates)

The Conservative Approaches:

Most Conservative:  If the price is not Par then the above Par BPS (basis points) serves as a credit to the borrower and below Par BPS would be a charge.  This will keep all things even when proving your secondary marketing methodology and serve you well in Fair Lending issues.

Example:  Price = 100.25 for 4.5% or Price = 99.75 for 4.375%

If a client wants 4.5% they get a .25 credit.  If a client wants 4.375% they get charged .25.

For instance, if your secondary marketing methodology is 50 bps in price for each 1/8th in rate up or down, this practice will prove consistent and applied equally each time.

Somewhat Conservative:  Set a threshold that you can live with above and below par where the price will reflect par no matter what.  For instance:  If the price is 25 basis points above or below par then you consider that par.  On some loans you win and on some loans you lose, but in the end the philosophy is that it will all even out in the long run.  Because this is the “consistent” application of the policy it will serve you well in proving your secondary marketing methodology.

Look at the same example above.  The difference with somewhat conservative is that there are no credits or debits provided the price is within 25bps.  Again, this is consistent and applied to all.

The Higher Risk Solution:

 

Shave off the premium that does not fit within the secondary marketing methodology and add it to corporate margin.

For instance:  Let’s say that your secondary marketing methodology is 50bps in price for each 1/8th in rate.  Anything that falls under the 50 bps (1bps-49bps) would be shaved to the corporate margin and the rate shown to the LO/Consumer is Par.

The issue with this solution is that it mathematically disrupts your secondary marketing methodology, making it difficult to say that it was applied equally, even though it was applied consistently.  When pricing isn’t applied equally, you have pricing disparity issues.  Some lenders have argued that this policy is consistent because it is applied to everyone.  While I do not disagree with that, it opens up another level of potential examination which a lender may or may not have time or tolerance for.  Let’s say that you have this policy.  You apply it consistently no matter who the client is.  However, during the exam the regulator would like to price trace the loans to check for pricing disparity.  When they do this it is possible that the shave on the corporate margin is disproportionately higher for minority clients.  Yikes!!

So, at the end of the day it is up to your company as to what their risk tolerance should be.  My recommendation to all is to consider a conservative approach until you see how the regulators are examining all of these new regulations.  After that you will know what may or may not be acceptable levels of risk.

 

Tammy Butler, Master CMB

Author Tammy Butler, Master CMB

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