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We are predominately a commercial bank that sells our consumer mortgage loans on the secondary market. In the past we have done very little portfolio mortgage loans and we generally offered only one rate for each product. Management would like create a risk-based pricing tier of maybe three rates. Does anyone have any simple risk rating scale they use that the examiners have reviewed and accepted? For example, we had contemplated saying the rate would be X if you had one variable that kept you from being approved on the secondary market. X+ 0.50 if you have two variables, X+1.00 if you have >2.00 variables. This just concerns me that we would be giving equal weighting to every variable, and I could see the loan officer wanting to make exceptions down the road for variables they perceived as less risky.
I think the method you described is going to be difficult to apply consistently. It is sometimes difficult to isolate how many “variables” keep a borrower from being approved on the secondary market. Maybe if you only deal with one investor it might be easier, but we have several investors. Additionally, program guidelines change from time to time, so what is OK today, may not fit the secondary box 6 months from now. You’d need to document those types of program changes to prove that you’re being consistent in how you apply your pricing variables.
We utilize a rate grid for portfolio mortgage loans that factors in LTV and credit score to the rate. I’m not sure if this is what you’re looking for, but if you’d like to see it, I’d be happy to share (as long as you’re not a competitor in my market – ha!)
If interested, email me at: ccantrell@bankoftennessee.com
As far as pricing exceptions, we decided the only times we would be willing to lower the rate from our grid would be for customers with extensive relationships and when we were up against pricing from a competitor. We have written procedures for the conditions and how much of a discount we’ll provide for a relationship and we’ve written procedures for matching a competitors rate. We make no pricing accommodations outside of those two circumstances.
The examiners (FDIC) were complimentary of our pricing procedures when they were here in 2013.
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