[CRAzy_Lady]

I am trying to decide whether we have risk in the way we currently price fixed rate Freddie Mac loans. Freddie gives our rate lock desk a range of qualifying interest rates for each loan. We select the rate according to the gain the bank wants to make on secondary market lending.

For example, say bank management determines that the bank should yield a 1.5% gain on all Freddie Mac loans. The range of interest rates given will bring a gain of 1.13, 1.42, 1.60, and 2.10 respectively. Normally, our rate lock desk would select the rate that offers the gain closest to 1.5, in this case 1.42. We would then charge the borrower a 0.08% delivery fee to bring the gain to 1.5.

If the borrower doesn’t want to have to bring that cash to the table, we would select a higher rate. So, if we select the rate at the 1.60 gain, should we then give the borrower a 0.10 credit to bring the gain back to 1.5? Could there be a fair lending risk if we don’t credit the difference, since we are essentially making a higher gain on some borrowers than others (especially if those we make a higher gain from happen to be protected class borrowers)?

I am curious how other banks manage their Freddie Mac pricing. Is there anything inherently wrong with making a gain of 1.5 on some loans and a gain of 1.85 (for example) on others?

[rcooper]

Great question. I think there’s potential for disparate impact with your process. It’s possible that a protected class may be less likely to afford bringing the extra funds to closing; because of that they’re charged a higher rate/results in a higher yield for your bank than borrowers who can bring additional funds. If that is the case, I think that has the potential to have a disparate impact to a protected class.

I’m going to see if our Board of Advisors CMG members can give you any feedback based on their processes.
Thanks for your patience!

[Send2k1]

This is a great question; I agree with Robin the key risk to consider is Disparate Impact, or even Abusive depending on results.
While my current Bank does not participate in the Secondary Market I remember this aspect being hard to evaluate from the last Bank as it soo far into the Operational details. The key to me is frequent and robust monitoring, more at a ~trend level (by Applicant Types, Sales Market, Officer, etc) to ensure you identify anything that may be inconsistency or unintended consequences. There are several software out there designed specifically to enable robust monitoring on even a real-time basis depending on risk/need. Tammy Butler, who was affiliated with one of those vendors, issues a blog that I thought did a good job of explaining some of the risks here. https://fairlendingdiversity.com/compliance-persons-guide-pricing-gibberish/

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