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Top Three Myths That Prevent Lenders From Adopting a Sound Commercial Loan Pricing Model

3 Reasons why Loan Pricing models are not used Top Three Myths That Prevent Lenders From Adopting a Sound Commercial Loan Pricing Model

Commercial loan pricing models

Are you allowing false beliefs and misconceptions to prevent you from recovering your costs and increasing your profit margins on your loans by adopting a commercial loan pricing model?

A reliable and consistent loan pricing model, like the PULPS Loan Pricing Model, helps lenders to increase their profitability by allowing the loan officer to be able to easily see how small changes in the terms of the loan can effect it’s price, rate of return, as well as it’s overall competitiveness in the marketplace.

Loan pricing models also allow lenders to be able to include factors such as the cost of loan origination and servicing, as well as risk, when pricing the loan. These models also help to ensure that lenders meet various regulations, such as the new requirements under Basel III and the FDIC’s minimum reserve-deposit ratio requirements that affect the number and quality of the loans that can be made by lenders.

Given the obvious benefits of having a loan pricing model, it might come as a shock to learn that very few lenders actually use them. Experts within the banking industry estimate that in general, only 15% of lenders with $1 Billion or more in assets use a loan pricing model for their commercial loans. For those who have less than $250 million in assets, its estimated that percentage drops to less than 1%.

When we examine the reasons why many lenders are hesitant to adopt a model for their loan pricing, we find that the decision usually comes down to one of the following three myths about loan pricing models.

1. Adherence to the “if it isn’t broken, don’t fix it” misconceptions. Many lenders believe that following the crowd and using the rates and prices set by their competitors has served them well so far, so there isn’t any reason to shake things up by changing to a model.

The main issue with this line of thinking is that it is difficult for most lenders to competitively price their commercial loans against the current low market rates. Pricing based on market rates also doesn’t allow lenders to offer loan price based on cash-flows rather than the rate of maturity.

2. A basic fear and distrust of using automated process, software, or “softbots” technology. These lenders believe that their personal relationship with the client allows them to be able to adequately forecast and price risk and overhead cost into their loan pricing so they are reluctant to rely on a program that would remove personal bias and guesswork from the equation.

A recent article in The New York Times talks about the public’s basic distrust of both physical robots and automated software technology. In the article, the reluctance of lenders to use software technology to price loans is discussed in depth. In general, many lenders distrust the use of algorithms and other non-human methods to gauge risk, or cost, and to correctly price such factors into loans.

The main trouble with this misconception is the fact that as human beings, we are imperfect, fallible, and given to bias. All of which can adversely affect our ability to price loans that are both competitive and at a rate that is in the best interest of the lending institution.

When we neglect to use a reliable and consistent loan pricing model, we also run the risk of running afoul of various mandated rules and requirements should regulators be able to detect bias in an individual loan, or throughout our loan portfolio.

3. Reluctance to change or to spend time learning and calibrating software. Fear that a loan pricing model will cost too much to purchase and implement, or that it will not provide a good return on investment as compared to the existing way of pricing loans.

Many lenders fear that it will take a lot of time to learn how to use a specific commercial loan pricing model, and that the time it takes to become proficient in learning the software is not well spent.

The PULPS Loan Pricing model dispels this false belief as it is very user friendly and designed to be used intuitively. Easy and convenient support is also just an email or phone call away.

Using the PULPS loan pricing model is both cost-effective and profit boosting as it not only helps you to issue more competitive and profitable loans for your institution, it also increases the efficiency of your individual loan officers.

If you’ve been allowing false beliefs and misconceptions about the cost, ease of use, or benefit of using a commercial loan pricing model hold you back, contact us to learn the facts about just how easy, efficient and low cost it can be to begin using a loan pricing model today!

Alan Lee
Podcast: www.TheSchoolOfBanking.com