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#1661222 - 02/06/12 08:28 PM Pricing Equipment Loans
La. Lady Offline
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If our bank decides to raise the interest rate on equipment loans and loans secured by inventory, do you see any fair lending implications?

Our CEO has always turned against this because of fair lending issues....We have a former examiner (S & S) and he is pushing to change the rates because the loans are risker.

Any input is appreciated.
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Lending Compliance
#1661230 - 02/06/12 08:51 PM Re: Pricing Equipment Loans La. Lady
Rocky P Online
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Florida
IMHO, if loans secured by equipment or inventory are made to prohibited basis individuals, or they are steered to those types of loans, it would be a problem.

All things considered, there is no issue if one product has a higher rate, especially if there is a higher risk. What the bank needs to do is analyze the product line and document that it costs more for; securing the collateral, inventorying the collateral, servicing the loan, riskier because of valuation, selling out of trust, etc, collections., etc. Documented higher risk - higher reward.

That being said, if the bank is going to do it to increase one product line, the bank might consider to do it for several, so the regulators cannot claim selective increases.
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#1661281 - 02/06/12 09:20 PM Re: Pricing Equipment Loans Rocky P
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Thank you....

Now another question....Suppose we have mixed collateral..For example, we have an equipment or inventory loan but we also take the real estate as collateral...It may be crossed collateralized with other loans and not enough on its own to provide full security...there is only "some" equity. Can we still have a higher rate?
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#1661391 - 02/07/12 02:45 AM Re: Pricing Equipment Loans La. Lady
Rocky P Online
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Florida
QoC, my same answer would apply. If the primary collateral would be the inventory, etc., then price to that collateral. Banks should understand their costs for any type of credit, from application through ultimate collection or disposition. That way, they make a decent profit and stay competitive.
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#1661394 - 02/07/12 03:00 AM Re: Pricing Equipment Loans La. Lady
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
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The bank also needs to understand its cost of funds and types of sources of funding - deposits, FHLB borrowings, etc. If the bank does not have this information at its fingertips it will eventually be severely criticized by its regulators for not understanding its risks.

Pricing should be established on loans according to cost of funds and risk (borrower risk, collateral risk, etc.)

It is not expected to be static over the years.

As long as borrowers are treated the same under such a program fair lending risk is minimized. That doesn't mean everyone pays the same rate, especially on business purpose loans, but that the same factors drive the rate.
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#1661451 - 02/07/12 01:51 PM Re: Pricing Equipment Loans Kathleen O. Blanchard
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Thanks everyone for your responses...this has been very helpful...I will send this information along to the appropriate personnel.....

Thanks again
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