Risk-based Pricing

The recent action by the Department of Justice has directed attention to risk-based pricing. Lenders that make loans to "B" and "C" borrowers generally use a risk grid to make decisions and set rates. These systems are legal as long as the elements have a clear connection to risk. As with all underwriting, the bank should understand its criteria and the connection between the underwriting criteria and credit performance. As long as the factors in a risk analysis system support good decisions without discriminating illegally, the risk analysis system should withstand scrutiny.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 14, 9/96