Financial institutions, which haven't already, will need to expand their lending efforts to include those borrowers outside the highest-grade segment of the consumer loan market. Reasons for “reaching deeper” into the loan pool include:

The competition is fierce for “A+ and A” borrowers. In many cases, these loans are priced lower than break-even.
When priced correctly and managed carefully, making loans to less-than-prime borrowers can increase ROAA by up to 30 BP.
Many impaired credit grade borrowers are victims of the “Great Recession”. As the economy improves, many less-than-prime borrowers will experience improving credit scores.
Studies show that less-than-prime borrowers tend to be more loyal to those financial institutions that provide credit than are prime borrowers.
Less-than-prime borrowers are more apt to use additional services of those institutions providing them credit – further contributing to a financial institution's income.
Studies show that those financial institutions that loan to less-than-prime borrowers using stochastically derived, risk-based loan pricing methods often experience increases in their customer bases, increases in loan portfolios, and improvements in profitability

Lending to less-than-prime borrowers requires careful pricing taking into account unique risks and costs associated with each credit-grade of borrower. Careful attention needs to be paid to adopting risk-based loan pricing tools that are stochastically derived and meet these criteria:

Identifies and quantifies all costs in the lending process unique to each credit grade.
Utilizes statistically derived methods for measuring and assigning costs to each credit grade.
Employs a regular validation process to maintain the model and assure pricing accuracy.
Identifies and creates credit-risk ranges according to statistically derived methods.
Provides pricing recommendations for each type of loan and risk class of borrower.
Provides “what if” capabilities so loan pricing changes under consideration can be tested for profitability before implementation.
Provides a foundation for loan policies including Concentration Risk

Using Effective Loan Marketing Methods

Instant Insights /

Optimistic Loan Projections Might Not Apply

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