Article By: Ben Giumarra, Spillane Consulting Group
You probably wonder if your attention to fair lending pricing issues is overkill. Could you be using your time more wisely? Well I don’t know because I don’t know you, but I do have a general way to self-assess your risk here (or lack thereof).
Pricing discrimination has been the big fair lending topic for awhile – it’s no longer as common to find discrimination in denials, it’s more common to find “special” treatment for “special” people.
How can you quickly assess your level of risk here (without this becoming a full-time job for you)? Well here are 4 questions to ask yourself. Grade yourself from 1-5 on each question and then you’ll know how safe you are. This is something to use for any lending department – whether it be mortgage, commercial, consumer, or other.
1- Is Pricing Locked Down?
Ask yourself whether your pricing should be the same borrower-to-borrower or whether it’s the wild west. Will one loan officer price things the same way as another? Too much discretion can increase compliance risk – although you cringe to see it eliminated entirely from a sales perspective.
If you have a written pricing policy, that will help (although not mandatory). The same is true with issuing rate sheets (or the functional equivalent).
Whether your pricing policies are conveyed through written materials or verbally, are the pricing criteria based on “specific, objective and defined criteria”? (see CFPB link below)
**Of course you’ll probably want to test this, which can drive you batty (where do I stop??) Well- for what it’s worth, we strongly recommend running analytical reports to check for fair lending outliers. Depending on your volume, most small- to mid-sized lenders would be best served doing this once or twice a year. Run the report and immediately see any loans that “don’t seem right.” Then you can look into a small number of loans that actually represent fair lending risk – rather than blindly checking for vague fair lending concerns.
2- Is Compensation Structured to Encourage Markup?
So since 2010 this has basically been a non-factor for mortgage lenders. In 2010, a Dodd-Frank rule kicked in that prohibited us from incenting loan officers to sell consumers higher cost loan products.
But this is still a valid question to ask for other departments, such as those commercial and consumer lenders. (And No- I’m not necessarily saying you should remove all incentive here.)
3- Any Complaints About Discrimination?
So chances are you haven’t had any such complaints. Good news! But followup question – what are your procedures for handling such complaints? If you know the answer, that’s great! Followup followup question … would your consumer-facing colleagues have the same answer?
4- Clear Documentation for Pricing Deviations?
Look back at your pricing exceptions – ideally you can easily run a report to see this.
Exceptions are to be expected. And I’m sure you’re not intentionally discriminating with loan pricing. But examiners are looking for unexplained instances where people get preferential treatment that isn’t offered to other borrowers.
The crying shame is that plenty of legitimate, non-discriminatory exceptions look bad without documentation. For example, an examiner pulls two loans – both same product, both borrowers applied same day, same credit criteria, loan amount, etc. One gets 4.25 and the other gets 4.125. The 4.125 borrower is a white male, where the 4.25 is a female minority. This doesn’t look very good. What happened here? Option A: You don’t know for sure and you might take this one on the chin. Option B: You have an e-mail showing you made a pricing exception to 4.125 to match an offer from a competitor – the borrower would have gone somewhere else if you stayed at 4.25. Guess what – that should get you back in the safe zone, representing proof that the pricing decision was not discriminatory, but rather made for non-discriminatory reason (competition).
None of this is any major breakthrough – but hopefully you find it a helpful way to look at things. For more information on what regulators are looking at in terms of fair lending pricing discrimination, here are some good sources:
In Other News
- Are you attending the MMBA’s Day 1 Certainty seminar on June 13th (Fannie and Freddie will be there). If not, are you crazy??
- Data breach at DocuSign exposes consumer e-mails! Uh-oh! That’s tough, but I’m still not sympathetic to “See, this is why we don’t allow E-Sign …”
- Do you (a) use an iPhone, (b) have family members that you care about, but (c) work obligations that you take seriously? Well I have an interesting tip for you – set your phone on “do not disturb” but allow for “repeated calls.” Your phone will not ring or make noise, unless someone calls multiple times within a short period of time and the phone will let such emergency calls to go through. Instructions from Apple here. (And yes I realize this has been around for 5 years haha – new to me!)
- Remember this lawsuit from 2015 where a Worcester jury awarded millions to a borrower when a participation loan fell through. The borrower hoped to build a hotel, but lost his investment when the credit union declined the loan, with the jury finding that employees unreasonably mislead the borrower into believing the loan would be approved. How do you avoid a situation like this yourself? Well, my colleague Brian Bacci has some interesting ideas on this topic – feel free to ask him yourself.
On My Mind …
Let’s talk about bathrooms in banks. No seriously – how many banks have public restrooms available? By many accounts, some banks are over-valuing (and over-investing in) physical branch locations. A customer might come in to the branch once a year, but visit your website 1,000 times over that period — why are we spending more on landscaping services than improving the website’s functionality and ease of access?
But recognizing that – and not trying to fix that all in one day – doesn’t it seem especially unusual that we don’t even make branches that great a place to visit? I mean, recognizing that we might be over-invested in the branch system, you’d think we’d at least make that as great as possible — but so many bank branches aren’t that fun to visit. “No Skateboarding!” signs everywhere! No public bathrooms. It’s always a super difficult experience to come in and get quarters for parking. We’re sitting on a huge investment, the value of which is based on its ability to draw in customers – and yet there are a hundred small things we’re doing that are defeating the purpose.
Nice places to sit
Free WiFi access
What about some crazier ideas? Opening some portions of the branch up for business meetings or childbirth classes? Why not find a way for the local Boy Scout Troop to hold weekly meetings there?
If you think you’re too small to make a difference, try sleeping with a mosquito.”
– Dalai Lama
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.