Risk Based Lending has two main aspects. The first is using a credit score to determine the rate that the member will get on the loan. The second is managing your portfolio. This is done by monitoring the percentage of loans you have in each risk category.
Policy is set as to how much of the loan portfolio is permitted in each of the lower categories and lending processes are modified if these percentages exceed the policy maximums.
Our programs are designed to monitor your loans by the risk category so that the credit union is aware of the state of their portfolio and can make minor adjustments before major adjustments are necessary.
It is important to understand that each credit score is a grading of the member at that point in time, it is not a grade of the loan.
The score itself should be placed at the account level every time a credit report is pulled. If the loan is approved and placed on the books then the credit score should be placed on the loan to note the category the member was in when the loan was established. This allows us to track loans and lending policy when loans go into delinquency.
The credit union then decides the percentage of loan volume desired in each category. Understanding that because the higher interest rate offsets the risk in the higher risk categories a program directed toward the desired income level from the portfolio may be initiated.
Since the category is a grade of the member’s risk to the credit union, all loans for that member are in the same category regardless of the category when the loan was funded.