Regulators and risk-based pricing

December 8, 2009 by Guest Contributor

By: Amanda Roth

During the past few months, we have been hearing from our clients that there is a renewed focus from the regulators/examiners on risk-based pricing strategies.  Many are requesting a validation of the strategies to ensure acceptable management of risk through proper loan pricing and profitability.

The question we often receive is “what exactly are they requiring?” In some cases, a simple validation of the scoring models used in the strategies will be sufficient.  However, many require a deeper dive into where the risk bands are set and how pricing is determined.  They are looking to see if applicants of the same risk level are being priced the same, and when the price is increased from tier A to B, for example.  Also, they’re checking that the change in rate is in line with the change in risk.  Some are even requiring a profitability analysis to show the expected impact of delinquency, loss and operating expense on net revenue for the product, tier and total portfolio.

We’ll address each of these analyses in more detail over the next few weeks.  In the meantime, what are you hearing from your regulators/examiners?