|
Fair Lending Analysis
Consumer finance lending and underwriting practices are increasingly
scrutinized as a result of legislation such as the Fair Housing
Act, Home Mortgage Disclosure Act, and the Equal Opportunity to
Credit Act. Most recently, lenders must report loan application
information. The public can now view loan pricing and rate spread
data by demographical group to identify suspect pricing patterns.
As a consequence, lenders may be required to explain and defend
their pricing practices and any identified pricing disparities.
In response to this, many lenders and insurers are opting to review
credit and underwriting policies proactively to address potential
fair lending or disparate impact issues.
To assist mortgage lenders, Bates White has developed a comprehensive
three-phase approach for evaluating portfolio and pricing practices
for any potential fair lending issues:
Bates White’s fair lending analysis services are unmatched
in the industry. We have Ph.D. econometricians and leading academics
who have pioneered many of today's statistical modeling techniques.
In addition, our consumer finance team is led by executives with
years of experience developing credit risk models and pricing
strategies across a wide range of consumer
finance products. This combination allows Bates White to apply
sophisticated analytical techniques to diagnose mortgage lenders’
fair lending issues and provide attractive pricing strategy alternatives
that maintain or improve profitability, while reducing the lender’s
exposure to fair lending issues.
Diagnosis of Pricing Practices
Bates White performs a comprehensive review of the mortgage lender’s
pricing system and the resulting rates charged to each protected
and unprotected class. To uncover the underlying cause of any
pricing disparities, we systematically deconstruct the price charged
to each individual, by each element, in the mortgage lender’s
pricing plan. This allows us to identify and measure structural
and unexplained pricing disparities between each of the demographic
groups.
Validation of Pricing Practices
The analysis in this phase involves a statistical examination
of the mortgage lender’s portfolio payment and performance
history. As part of this analysis, each aspect of the lender’s
pricing plan is evaluated against the underlying credit risk.
This allows us to establish the credit risk impact of various
credit profiles and correlate pricing differences with the credit
quality profiles which the underlying credit risks produced.
Alternative Pricing and Credit Scoring Strategies
Even for portfolios where all pricing disparities are explained
by differences in credit quality, mortgage lenders can improve
fair lending results by evaluating alternative credit scoring
and pricing strategies. By constructing advanced credit scoring
models or modifying certain elements of the pricing system, lenders
can reduce pricing disparities without sacrificing the ability
to predict risk. The result is lenders maintain or even improve
profitability, while providing more accurate pricing to their
portfolio. Additionally, this analysis may reduce pricing disparities
between the various demographic groups.
Click here for details
on selected fair lending analysis experience.
|
