Home Equity Pricing to Tighten

Over half of the lenders polled last August for the Home Equity Lending Pricing Practices Survey are evaluating price optimization solutions in order to take a more profit-based pricing approach, according to a joint announcement from Benchmark Consulting International and Nomis Solutions. Just 9 percent currently utilize price optimization software.

The survey was conducted by Benchmark on 22 of the leading home equity lenders, of which 15 represented more than three-quarters of home equity loan origination, the statement said.

Most of the lenders reported they had multiple divisions that were responsible for setting pricing, according to the report. The majority of respondents said department heads from product management, finance and credit risk handle pricing.

Product management was involved nine out of 10 times for setting price and for more than a third of the lenders it had the primary responsibility of setting price, the report revealed.

There were four pricing models used by all of the participants: risk-based pricing with adjustments for competitive rates (59 percent), market-based pricing (41 percent), risk-based pricing (18 percent) and profit-based pricing or price optimization (18 percent).

Seventeen pricing factor categories were listed, of which most used an average of eight factors when determining price.

Every lender said competitive rates were a constant factor used during the pricing process, the survey said. The top seven factors considered thereafter were cost of funds, loan-to-value/combined loan-to-value, costs and expenses, loan/line size, geographic areas, FICO or credit score and autopay discount.

A majority of lenders had 500 or fewer price points, although one had more than 100,000 price points to consider, according to the report. The majority also said they review origination fees, LTV bands and other pricing points either annually, quarterly or as needed.

All lenders except one said they compare prices from one or more sources, the report said.

“I believe that the Home Equity Lending marketplace is going to experience major changes in the next two years,” Benchmark’s Home Equity Lending Practice Manager J. Brian King said in the announcement. “Leading banks are now starting to investigate innovative ways to differentiate themselves and to strategically squeeze more profits in some areas of the business while maximizing market share in others.”