The FINANCIAL — The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) released a report today which finds that risk-based pricing lowers the cost of credit for the majority of borrowers while simultaneously expanding credit availability to higher-risk borrowers, and leads to a broader array of loan products available to all income groups, according to the U.S. Chamber of Commerce.
“Risk-Based Pricing in Consumer Lending,” by Endowed Chair and Director of the Take Charge America Institute at the University of Arizona Prof. Michael Staten, PhD, examines how risk-based pricing has transformed consumer credit markets in the U.S., benefitting both individual consumers and the macro-economy.
“Thanks to information available to lenders through credit scoring and reporting, millions of consumers who just a generation ago were simply denied access, can now responsibly get credit, insurance, and a host of other financial services that allow them to do everything from replace a refrigerator that quits working, to rent their first apartment, to pay for their children’s dental work,” said David Hirschmann, president and CEO of CCMC. “Reverting back to a ‘one rate fits all’ system, which some have suggested, means average consumers will no longer be able to access the credit they need to purchase goods and services when they need them.”
The report notes that since the late 1980s, consumer lenders have relied on statistical credit scoring models to set loan rates appropriate to a borrower’s risk. Initially used by bank credit card issuers, the practice soon spread to automobile lenders, and eventually mortgage lenders. Regulatory agencies, including the Federal Reserve, now encourage lenders to adopt risk-based pricing to protect the safety and soundness of financial institutions as they broaden credit availability to include higher-risk borrowers.
“The recurring theme here is that ongoing innovation in both credit scoring and the application of risk-based pricing has dramatically expanded credit availability to millions of consumers who were previously under-served by conventional loan markets,” Dr. Staten states in the report. “Rather than shutting these individuals out of the market, scoring and risk-based pricing have given lenders the tools and incentives they need to say ‘yes’ to loan applications from a far wider cross-section of the population than ever before.”
Since its inception in 2007, the Center for Capital Markets Competitiveness has led a bipartisan effort to modernize and strengthen the outmoded regulatory systems that have governed our capital markets. The CCMC is committed to working aggressively with the administration, Congress, and global leaders to implement reforms to strengthen the economy, restore investor confidence, and ensure well-functioning capital markets, according to the U.S. Chamber of Commerce.
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