After being at record lows for nearly a decade, the Fed has raised interest rates three times in the past fifteen months. Although the current rate of 1% is still historically low, the rate environment has been static up until December of 2016.
The low rates have made profitability for lending institutions more challenging but have made managing fair lending pricing risk easier. If the rate environment continues to be dynamic, this becomes another variable that must be considered in regard to managing fair lending risk. The changing environment has the potential to influence the fair lending regulatory environment as well.
In 2004, financial institutions began reporting “rate spreads” on their HMDA LAR. Simply, if the APR on a loan exceeds certain tolerances then an institution has to report the difference between the tolerance and the APR which is known as the “spread.” This reporting allowed examiners to access pricing practices based on the LAR by evaluating both the incidences of loans with spreads being reported as well as the magnitude of the spread.
Prior to the financial crisis, this provided examiners with a great deal of information as rates were higher and there was a high frequency of rate spreads reported. Although it is a distant memory, institutions were also facing an inverted yield curve with longer term rates being lower than short term rates.
This meant a significant difference in bank portfolio loan pricing relative to the secondary market which created even greater variation in pricing. The rate spreads as reported on the LAR, therefore, provided fertile ground for examiners to evaluate loan pricing practices. Additionally, the rate environment was also dynamic which further elevated pricing variation and, therefore, risk.
Fast-forward to today and looking back at the last decade, pricing inquiries with regard to fair lending have taken a back seat to other focuses such as loan underwriting and redlining. As the rate environment becomes more fluid and loan activity increases with improvement in economic conditions, institutions are likely to face more challenges in regard to pricing practices and, therefore, more pricing risk with respect to fair lending.