As we have noted previously, banks across the board are performing better in regard to earnings. This is in part due to an improving economy and consumer confidence, but also to the rising rate environment. Although rates are still at historic lows, prime is one percentage point above the 10 year low of 3.25 and stands currently at 4.25.
Importantly, this one point swing has occurred in the last 20 months after virtually no movement for 7 years. Although the rising rates are good for the bottom line for lenders, as the Fed Funds rate was essentially at 0 for a long period, it does raise the prospect of elevating fair lending pricing risk. There are number of reasons for this.
Fair Lending Risk in a Changing Economy
First, in a static rate environment, managing fair lending risk with respect to pricing is a fairly easy task. The rates are stagnant, thus there is little movement in rates. Additionally, the rates are very low resulting in smaller differences in terms of magnitude of pricing differences. Therefore, differences in rates charged are less likely to be significant.
Second, since rates are not moving, time periods in which loans are originated and priced have very little impact. An analysis, therefore, over an extended time period would not be subject to differences based on time period.
The third reason is in part a product of the first two reasons. Because fair lending pricing risk has been low, lenders have paid less attention to this area and have been more focused on other areas. As they have not been accustomed to being concerned about pricing risk it is sometimes difficult to make the adjustment to bring this as a potential issue back to the forefront.
The End Result
The result, of course, can be problems with communications, keeping rate sheets and software applications up to date, and making sure loan officers are aware of changes in both rates and policy. This all leads to potentially more variation in loan pricing, hence more risk.
If an institution has not thought much about fair lending pricing risk lately, now may be a good time to begin doing so.
