Risk-Based Pricing for Loans: Overview
CU*BASE Risk-Based Lending lets you automatically price member loans according to the level of risk associated with granting and servicing those loans. Traditionally done manually when a loan request is set up, the new automated system eliminates guesswork and applies your loan rate guidelines accurately and consistently across the board.
Risk-based pricing is configured using both the member's credit score and paper grade (risk level). Within the loan product configuration, you can set up a separate risk-based pricing group for each possible paper grade used by your credit bureau. Within each group, you can define up to eight different balance tiers.
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For example, you could configure one rate for members with “A” paper and a score from 500-700, and a different rate for “B” paper with the same score range.
Because each loan product code can be set up with default parameters such as term and payment frequency, in effect this gives you maximum flexibility in designing risk-based pricing matrices based on loan term and other factors.
If you use the CU*BASE online credit bureau access system to pull credit reports, the credit score is automatically recorded on the Open End Loan Contract/Risk Pricing screen (Loan Action Code “LC”). A paper grade/risk level indicator may also be provided to you as part of the credit report file if your credit union has an agreement for Decision processing from your credit bureau vendor.
When a new loan request is created using a loan product code that is configured for risk-based pricing, CU*BASE will automatically check the member's credit score and paper grade against the pricing configuration and feed the appropriate rate into the Interest rate field on the Loan Request screen. This rate can be changed manually if appropriate according to credit union policy.
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IMPORTANT: CU*BASE will pull in the risk-based rate only when the loan request is first created. It will NOT automatically change the rate on an existing loan request if a new credit report is pulled.
Special Note Regarding FUEL
If your credit union uses FUEL for automated decision modeling, be aware that the system currently uses only a single tier of risk-based prices (up to 8 credit score ranges and corresponding rates can be set up in that tier). The Level must be set to 0.
Related Materials
Online Credit Bureau Access and FUEL (2) Configuring FUEL and the Approval Matrix
Online Credit Bureau Access and FUEL (3) User Guide