Does Risk Based Price Need to be Validated?
by Randy Carey, & Andy Zavoina, BOL Gurus Guru BIOS
Question: We use risk based pricing. Are there any regulations that require the risk based price to be validated? What does "validation" mean?
Answer - Randy: I would recommend that all banks that institute risk based pricing perform some sort of validation on their pricing module. If you don't, what very well could happen is that if your pricing model has a disparate impact on a protected class, you are going to have to prove that you have a legitimate "business necessity." The justification may not be hypothetical or speculative.
Answer - Andy: The "validation" is simply your justification for the pricing. This is commonly based on the applicant's qualifications and the increased rate or fees due to a short time of employment, high debt ratio, lack of collateral, etc. And I would add to Randy's reasoning that the FACTA amendments to the FCRA will (eventually) require a risk-based pricing notice.
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