People constantly ask me whether flexible or variable pricing violates fair lending laws. Before addressing this question, it is important to remember that fair lending claims ask whether differences exist in the pricing minorities receive as compared to non-minorities to a sufficient degree that these differences cannot be explained by randomness? In other words, when examining similar loans and similar borrowers, are there statistically significant deviations in pricing demonstrating that something other than legitimate differences between borrowers and general randomness explain the disparity? Fair lending violations arise if such unexplainable differences exist along lines pertaining to minority groups.
Of course, there is no reason why variable pricing should result in statistically significant pricing disparities among minorities. Assuming there are 25 loan officers, each with different pricing, and the public randomly does business with them, there is no reason a statistical disparity should arise. While there could be specific instances of a minority getting a higher price than a non-minority, unless improper influences are at work, there should be similar instances of non-minorities getting higher prices resulting in an overall across the board statistical balance. Hence, variations in pricing that randomly apply to borrowers of different races should not result in a statistically significant disparity.
This is not to say that abuses by individual loan officers could not lead to fair lending issues. Rather, flexible pricing requires proper implementation, which includes policies, training and monitoring procedures. The bottom line is that variable pricing does not create a fair lending problem. However, like any situation involving personal discretion and flexibility as it pertains to borrowers, you must have proper policies and procedures in place.
