Almost all financial institutions in the U.S. have jumped into the practice of risk-based lending. A few were just flat-out duped and fooled; but the vast majority were willing victims - they really didn't mind playing the fool at all.
Lot's of money to be made fleecing folks with risk-based lending! For decades lenders were repeatedly caught purposefully overcharging and exploiting the unknowledgeable, the vulnerable, the too trusting - y'know good-hearted folks, your family and friends. Lenders looked like heartless loan sharks when exposed - and were.
Lenders needed protection from this type of constant harassment by "do-gooders" - y'know good-hearted folks, your family and friends..
Faux "statistical legitimacy", consciously misapplied via credit score pricing, has now provided risk-based lenders with the political cover, which today makes the shearing of the sheep mere child's play - easy
pickings!!
And generally, when given a choice between "good and gold"... well, you know how that usually comes out these days!
In risk-based lending, credit scores are used to establish a tiered-rate chart with members with lower scores paying higher rates. The statistically valid idea is that if lower credit scores create higher loan losses, then those members causing the losses should reasonably be charged for those higher losses No problem with that!
😎 The problem arises when you overcharge the wrong people (over 80%+ of the time!) for those higher losses. An 80% error rate in any product or service should be unacceptable, shouldn't it? Borrowers who default don't pay for the losses - as they say "duh-h-h-h"! They don't pay anything at all - that's what "default" means - got it?!? The "wrong people" being charged for those losses are of course the SECU members in the group who faithfully do repay their SECU loans. And, you know who those folks are? Yep, you guessed it - good-hearted folks, your family and friends.
Let's take a look at an example of why RBL is a really bad deal for SECU borrowers.
Pick the Queen! Your odds are 1 in 5 - 20%. |
Now just for the sake of argument,
let's assume you used a bit more rational, fair and defensible method of
determining the risk of the borrower, rather than just "eenie-meenie" or the "pick a card" risk-based lending model.
And you know who holds all the cards... on this sleight of hand, this slight of the membership?