Pricing Loans Based On Credit Scores

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Question:

We are considering using a customers credit score to price their loan. (The credit scores we use come from the Credit Bureau.) With the theory that the lower the score the more risk involved. An example would be, New Auto Loan, credit score over 670, rate would be 7.49%; credit score between 620-670, rate 7.99%; and credit score less than 620, rate 8.49%. My question is are we OK pricing our consumer loans like this? Any pitfalls, reg violations?

Answer:

Many banks have moved to this type of pricing. It is very sound way to set interest rates from a Fair Lending perspective. The only potential pitfall that I am aware of, is when (if ever) a loan officer is allowed to make exceptions to the pricing guide.
First published on BankersOnline.com 3/3/03