Chapter 4: Credit File Ancillaries, etc.
IN THIS LESSON
What Is Risk-Based Pricing?
Risk-based pricing in the credit market refers to the offering of different interest rates and loan terms to different consumers based on their creditworthiness. Risk-based pricing looks at factors associated with the ability of the borrower to pay back the loan, namely a consumer's credit score, adverse credit history (if any), employment status, income, debt level, assets, collateral, the presence of a co-signer, and so on. It does not consider factors such as race, color, national origin, religion, gender, marital status, or age which is not allowed based on the Equal Credit Opportunity Act. In 2011, the U.S. instituted a new federal risk-based pricing rule which requires lenders to provide borrowers with a risk-based pricing notice in certain situations.
Risk-based pricing may also be known as risk-based underwriting.
Understanding Risk-Based Pricing
Risk-based pricing has historically been relied on in the credit market as an underwriting methodology for all types of credit products.