How Can Credit Optimization Make Lenders More Money?

When lenders offer to help borrowers optimize their credit and either qualify for a loan they otherwise would not have or get a better deal on a loan they were already qualified for, it builds trust and provides other emotional benefits that result in more business for the lender.

But that’s not all it does.

A detailed analysis of Fannie Mae loan purchase data shows another way lenders can make more money with credit optimization. The secret is codified into the GSE’s Loan Level Pricing Adjustment tables. To learn more about LLPAs, Credit and Profitability, click here to download our white paper.

In this article, we explain how these tables and credit optimization combine to increase lender profitability.

Simple mortgage math every lender knows

If you ask Dan Green, principal at Hangar 6 Consulting, to explain how lenders achieve profit, he’ll tell you it’s pretty basic math. The lender simply takes the revenue from each loan and subtracts all of the expenses that come from originating the loan to get a net profit.

Lenders know their typical costs for loan origination but often forget those additional costs that come after the loan is closed, like the fees their investor charges based on the perceived risk in the deal.

About a year ago, Fannie Mae and Freddie Mac announced changes to their Loan Level Price Adjustment (LLPA) schedule. The changes were fairly significant and brought the LLPA tables back to the attention of many executives who hadn’t been giving them much consideration. Loan-level Price Adjustments had become part of the tapestry of mortgage math (there’s a twisted metaphor), left to the magicians in secondary marketing.  Many simply considered them part of the back-office, secondary marketing function. No direct lines were drawn back to the beginning of the transaction.

But that changed with the new tables. Even borrowers picked up on the news and began to ask questions about the true cost of their loans. It prompted Green to dig into the data to find out what, if anything, lenders could do to reduce these costs and improve their bottom line.

The surprising impact of credit scores on LLPA fees

LLPAs are complex. There are a number of factors that contribute to arriving at an LLPA fee for a given loan, but the most significant two are the Loan-to-Value (LTV) ratio and the borrower’s credit score. Considering only these two loan elements in our analysis will demonstrate how optimizing credit impacts LLPA fees.

Readers of this blog know that lenders who use CreditXpert can help borrowers raise their credit score by at least one 20-point bucket in about 30 days. But what impact will that have on the lender’s LLPA fee?

Green decided to find out. He took all the loans Fannie Mae purchased in a single quarter and then determined which borrowers could have increased their credit scores and what impact that would have had on LLPAs.

All the data was written up in an free eBook, which provides details on the five LLPA zones that a loan could fall within and which zones are most beneficial for the lender in terms of LLPA savings. In one example, taking a borrower’s score from 640 to 680 reduced the lender’s LLPA by $1,800. That’s additional income that goes right to the lender’s bottom line. Those funds can be used by the lender for any purpose, including offering borrowers reduced closing costs.

Applying the results Green found to a typical lender’s portfolio shows that an average lender could be paying 17% less in LLPA fees by optimizing credit. For an average-sized lender, this equates to hundreds of thousands of dollars in increased net income each year.

Find out more about how much money your institution is leaving on the table by reaching out to CreditXpert today. Optimizing consumer credit to lower LLPA fees is one of the easiest ways to increase your profits.