Pricing for portfolio growth and profitability

By: Staci Baker Top five things to know about the Risk-Based Pricing Rule As many of you are preparing for the new Risk-Based Pricing Rule to take effect on January 1, 2011, I want to give you an overview of the top five things you need to know to ensure your business is compliant. 1. Applicability: Any company that uses a credit report or score in connection with a credit decision will be required to comply with the Risk-Based Pricing Rule. 2. Obligation: A lender is obligated to send a notice to a consumer when they use a credit report or score in connection with a credit transaction.  When the lender provides credit to the consumer on material terms* that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that lender (any consumer who does not receive the lender’s best rate) based on the credit report or score, the lender is required to take action. 3. Compliancy:  Lenders will be required to provide applicable consumers with the following: • A Risk-Based Pricing Notice, or • A Credit Score Disclosure Exception Notice • Model forms are available in the final ruling issued by the Federal Reserve Board and Federal Trade Commission 4. Exceptions to the Rule: There are several exceptions to the Rule, including: • When a lender is making a pre-screened offer or providing an adverse action notice, or • When a consumer applies for specific credit terms or business credit (all credit that is not for personal, family or household use is excluded from the rule.) 5. Exclusions to the Rule: Any lender who does not use a credit report or score in connection with a credit decision is excluded from the ruling.  The ruling does not apply to small business lenders also. These top five key components of the Rule should get you on the way to compliancy by the beginning of the year.  A pre-recorded webinar is available to give you additional information on compliancy and requirements of the Risk-based Pricing Rule. The Federal Reserve, http://www.federalreserve.gov/reportforms/formsreview/RegV_20100115_ffr.pdf * “Material terms” in most cases of the Rule are defined as the APR of the loan

Published: December 3, 2010 by Guest Contributor

By: Wendy Greenawalt In a recent poll conducted by Experian, 82 percent of the respondents indicated they were undecided or currently assessing options for complying with the Risk-Based Pricing Rule. If your organization is also considering which compliance option is right based on your unique circumstances, I would encourage you to act soon, as the deadline is quickly approaching. Some organizations have decided that they will be utilizing the Credit Score Disclosure Notice as their preferred compliance option, as it is supplied to all consumers and requires minimal procedural changes and maintenance. While at first glance this option may seem to be the most streamlined approach, it does come with its own considerations. The Disclosure Notice form letter is straightforward and includes minimal inputs such as the consumers credit score, score source, range of the score and a corresponding score distribution. The downside is that the Disclosure Notice must be provided individually to all consumers, even those that reside at the same address, and must be given in a format in which the consumer can keep/reference. This means there will be an inherently higher cost to mail or electronically provide the form to each applicant and obtain the required eSign confirmation (where applicable). The score distributions must be updated on a regular basis and lenders must be prepared to answer consumer questions related to scores and how they are derived. Conversely, the Risk Based Pricing Notice, which is the primary compliance option outlined in the rule, is provided to a specific segment of consumers and can be provided verbally, electronically or in writing. A model form is supplied in the ruling and requires a lender to provide the credit reporting agency used to obtain the consumers credit data and contact information for the agency. Some lenders feel the notice has awkward language; however I tend to think most consumers have a basic understanding of their credit and the language in the form will not provide a negative consumer experience. The language tells the consumer “the terms offered to you may be less favorable than the terms offered to consumers who have better credit histories”. The disadvantage of this notice is that a lender must determine which consumers must receive the notice, and this policy must be updated periodically. Fortunately, the ruling states that a lender must only review the policy every two years. For most lenders this will not be a problem as they perform more frequent reviews and validations of their portfolios and determining which consumers receive a notice can be performed at the same time with minimal resources. Lenders should carefully consider their compliance obligations in relation to the ruling and determine which notice is best for their organization given resource, maintenance and cost requirements. The January 1, 2011 deadline is looming and there is no indication that the effective date will be extended. I suspect the regulatory requirements will continue to evolve over the next few years with the creation of the Consumer Financial Protection Agency, which has the authority to set and enforce rules under 12 federal laws and the implications will continue to put a strain on lending institutions.

Published: October 13, 2010 by Guest Contributor

US interest rates are at historically low levels, and while many Americans are taking advantage of the low interest rates and refinancing their mortgages, a great deal more are struggling to find jobs,  and unable to take advantage of the rate- friendly lending environment.  This market however, continues to be complex as lenders try to competitively price products while balancing dynamic consumer risk levels, multiple product options and minimize the cost of acquisition. Due to this, lenders need to implement advanced risk-based pricing strategies that will balance the uncertain risk profiles of consumers while closely monitoring long-term profitability as re-pricing may not be an option given recent regulatory guidelines. Risk-based pricing has been a hot topic recently with the Credit Card Act and Risk-Based Pricing Rule regulation and pending deadline. For lenders who have not performed a new applicant scorecard validation or detailed portfolio analysis in the last few years now is the time to review pricing strategies and portfolio mix. This analysis will aid in maintaining an acceptable risk level as the portfolio evolves with new consumers and risk tiers  while ensuring short and long-term profitability and on-going regulatory compliance. At its core, risk-based pricing is a methodology that is used to determine the what interest rate should be charged to a consumer based on the inherent risk and profitability present within a defined pricing tier. By utilizing risk-based pricing, organizations can ensure the overall portfolio is profitable while providing competitive rates to each unique portfolio segment. Consistent review and strategy modification is crucial to success in today’s lending environment. Competition for the lowest risk consumers will continue to increase as qualified candidate pools shrink given the slow economic recovery.  By reviewing your portfolio on a regular basis and monitoring portfolio pricing strategies closely an organization can achieve portfolio growth and revenue objectives while monitoring population stability, portfolio performance and future losses.

Published: July 10, 2010 by Guest Contributor