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In-house Versus “Out-house” Commercial Loan Pricing Models (Part II)

In a prior blog I talked about a couple of reasons for having an external model versus having an internally designed model.  This is a follow-up to that first blog.  Many of the internal, commercial loan pricing models I have seen are developed to be “all encompassing”.  In other words they become so complicated that they are cumbersome to use and attempt to do more than they should be intended to do.  As a result the models aren’t used to the extent than can be and therefore don’t provide the help to the lenders they are designed for.  The KISS (“Keep It Simple …..”) factor is an important one here.  The users of the model want to have confidence in the model and quite frankly could care less about the formulas designed to provide duration of the loan, risk cost, etc.  The users should be expected to know the methodology, but to understand the analytics behind the model is far too much to expect.  This brings me to the point.  In developing the model, the in-house expertise in the IT area is more in the area of programming and not analytical development.  Therefore to expect IT, or the lending staff to develop the analytics may be more than an institution can ask for.  Therefore, leave it to the experts who have spent dedicated time to create the loan pricing model.  At the prices for the models available today, it could be the best dollars spent.


Phill Rowley