Is your pricing compliant? Questioning a long-held assumption…
CC Pace recently completed an interesting project for a mortgage lender who had just done an acquisition. The project questioned a fundamental assumption of loan pricing and whether the existing approach was compliant or not. One entity had “branch” pricing (as do many lenders), where the price quoted to the borrower is based on the branch rate sheet of the loan officer that the borrower works with. The second entity, however, had pricing based on where the property was located (also a common practice). Compliance recognized that these two different methodologies could result in disparate pricing to the consumer, potentially leading to fair lending violations.
Having been in the industry for a long time, the notation of pricing based on the loan officer’s rate sheet didn’t seem unusual to me. We have implemented this model many times, going back to the 1980’s. It was so ingrained that I had never really thought about it. But this project challenged my assumptions and changed my way of thinking—for the better.
In retrospect, under the “right” (wrong?) use cases the lender could have faced fair lending penalties even before the acquisition. For example, if a borrower was looking for loan for a second home and had gotten quotes from both their local branch and from the branch in the property’s geography, those quotes could easily have been different.
Our client’s Compliance group recommended moving everyone to the geographic model – pricing based on where the property is located, not based on where the loan officer is located. And pricing should include “junk” fees, which were determined by the Sales organization, whereas Secondary determined rates & points. CC Pace’s role was to lead this transition, a major shift for a lender who hadn’t re-thought their pricing in many years.
Redesigning processes that were deeply ingrained in the organization and systems made for an interesting project. How do you define the geographies? Zip code level is too small to be compliant; MSA is better. But using every MSA in your footprint may be too many geographies to maintain. How do you align the “junk” fees with the geography and with the organization? Who actually sets the branch rates? What updates do you need to make to your rate sheet? What new training do you need to do?
Much of the elapsed time for the project was spent in the conceptual design and getting it approved by the stakeholders and Compliance. However, the bulk of the man-hours were spent updating and testing the pricing engine and loan origination system for both pricing and fees, and then testing the systems across all the different use cases (retail, call center, digital). There was also a need for some organizational realignment of responsibilities. Surprisingly, however, the re-training of loan officers turned out not to be very difficult.
I came away from this experience realizing that this was an important project that many lenders may need to consider, even if they are not doing an acquisition.
How does your organization price loans?