Question & Answer

Question: We generally make loans only to A and B credit customers. We have a loan application from an individual with poor credit (rated C) who has brought in a highly qualified co-signer. If we make the loan, we want to charge a higher rate because of the risk associated with the primary borrower. Is this OK or does it raise fair lending problems?

Answer: You are right to be concerned about fair lending. This is the kind of practice that is OK if done carefully but can quickly go astray if done haphazardly - i.e., without a policy to support it.

The bank regulatory agencies have all supported the concept of risk based pricing. The fact that you are making only one higher risk loan does not prevent you from pricing the loan accordingly. However, you should take several steps to ensure that fair lending questions do not loom up now or later. First, make sure that all of your lenders understand that this type of lending and pricing must be done according to policy. You do not want inconsistencies cropping up down the line because of creative loan officers.Second, consider the actual pricing carefully. Set a price that is consistent with the prices you're a and B credit borrowers pay plus the additional risk. In short, be able to defend and explain your pricing.

Copyright © 1998 Compliance Action. Originally appeared in Compliance Action, Vol. 3, No. 12, 10/98