Financial Services

By: Staci Baker Just before the holidays, the Fed released proposed rules, which implement Sections 165 and 166 of the Dodd-Frank Act. According to The American Bankers Association, “The proposals cover such issues as risk-based capital requirements, leverage, resolution planning, concentration limits and the Fed’s plans to regulate large, interconnected financial institutions and nonbanks.” How will these rules affect you? One of the biggest concerns that I have been hearing from institutions is the affect that the proposed rules will have on profitability. Greater liquidity requirements, created by both the Dodd-Frank Act and Basel III Rules, put pressure on banks to re-evaluate which lending segments they will continue to participate in, as well as impact the funds available for lending to consumers.   What are you doing to proactively combat this? Within the Dodd-Frank Act is the Durbin Amendment, which regulates the interchange fee an issuer can charge a consumer. As I noted in my prior blog detailing the fee cap associated with the Durbin Amendment, it’s clear that these new regulations in combination with previous rulings will continue to put downward pressures on bank profitability. With all of this to consider, how will banks modify their business models to maintain a healthy bottom line, while keeping customers happy? Over my next few blog posts, I will take a look at the Dodd-Frank Act’s affect on an institution’s profitability and highlight best practices to manage the impact to your organization.

For as long as there have been loans, there has been credit risk and risk management. In the early days of US banking, the difficulty in assessing risk meant that lending was severely limited, and many people were effectively locked out of the lending system. Individual review of loans gave way to numerical scoring systems used to make more consistent credit decisions, which later evolved into the statistically derived models we know today. Use of credit scores is an essential part of almost every credit decision made today. But what is the next evolution of credit risk assessment? Does that current look at a single number tell all we need to know before extending credit? As shown in a recent score stability study, VantageScoreSM remains very predictive even in highly volatile cycles. While generic risk scores remain the most cost-effective, expedient and compliant method of assessing risk, this last economic cycle clearly shows a need for the addition of other metrics (including other generic scores) to more fully illuminate the inherent risk of an individual from every angle. We’ve seen financial institutions tightening their lending policies in response to recent market conditions, sometimes to the point of hampering growth. But what if there was an opportunity to relook at this strategy with additional analytics to ensure continued growth without increasing risk?  We'll plan to explore that further over the coming weeks, so stick with me.  And if there is a specific question or idea on your mind, leave a comment and we'll cover that too.

By: Staci Baker Just before the holidays, the Fed released proposed rules, which implement Sections 165 and 166 of the Dodd-Frank Act. According to The American Bankers Association, “The proposals cover such issues as risk-based capital requirements, leverage, resolution planning, concentration limits and the Fed’s plans to regulate large, interconnected financial institutions and nonbanks.” How will these rules affect you? One of the biggest concerns that I have been hearing from institutions is the affect that the proposed rules will have on profitability. Greater liquidity requirements, created by both the Dodd-Frank Act and Basel III Rules, put pressure on banks to re-evaluate which lending segments they will continue to participate in, as well as impact the funds available for lending to consumers.   What are you doing to proactively combat this? Within the Dodd-Frank Act is the Durbin Amendment, which regulates the interchange fee merchants are charged. As I noted in my prior blog detailing the fee cap associated with the Durbin Amendment, it’s clear that these new regulations in combination with previous rulings will continue to put downward pressures on bank profitability. With all of this to consider, how will banks modify their business models to maintain a healthy bottom line, while keeping customers happy? Over my next few blog posts, I will take a look at the Dodd-Frank Act’s affect on an institution’s profitability and highlight best practices to manage the impact to your organization.

As we kick off the new year, I thought I’d dedicate a few blog posts to cover what some of the consumer credit trends are pointing to for potential growth opportunities in 2012, specifically on new loan originations for bankcard, automotive and real estate lending. With the holiday season behind us (and if you’re anything like me, you have the credit card statements to prove it!), I thought I’d start off with bankcards for my first post of the year. Everyone’s an optimist at the start of a new year and bankcard issuers have a right to feel cautiously optimistic about 2012 based on the trends of last year.  In the second quarter of 2011, origination volumes grew to nearly $47B, up 28% from the same quarter a year earlier.  Actually, originations have been steadily growing since the middle of 2010 with increasing distribution across all VantageScore risk bands and an impressive 42% increase in A paper volume.  So, is bankcard the new power portfolio for growth in 2012? The broad origination risk distribution may signal the return of balance-carrying consumers (aka:  revolvers) from those that pay with credit cards, but pay off the balance every month (aka: transactors).  The tighter lending criteria imposed in recent years has improved portfolio performance significantly, but at the expense of interest fee profitability from revolver use.  This could change as more credit cards are put in the hands of a broader consumer risk base.  And as consumer confidence continues to grow, (it reached 64.5 in December, 10 points higher than November according to the Conference Board) , consumers in all risk categories will no doubt begin to leverage credit cards more heavily for continued discretionary spend, as highlighted in the most recent Experian – Oliver Wyman quarterly webinar. Of course, portfolio growth with the increased risk exposure requires a watchful eye on the delinquency performance of outstanding balances.  We continue to be at or near historic lows for delinquency, but did see a small uptick in early stage delinquencies in the third quarter of 2011. That being said, issuers appear to have a good pulse on the card-carrying consumer and are capitalizing on the improved payment behavior to maximize their risk/reward payoff.   So all-in-all, strong 2011 results and portfolio positioning has set the table for a promising 2012.  Add an improving economy to the mix and card issuers could shift from cautious to confident in their optimism for the new year.  

By: Joel Pruis Small Business Application Requirements The debate on what constitutes a small business application is probably second only to the ongoing debate around centralized vs. decentralized loan authority (but we will get to that topic in a couple of blogs later). We have a couple of topics that need to be considered in this discussion, namely: 1.     When is an application an application? 2.     Do you process an incomplete application? When is an application an application? Any request by a small business with annual sales of $1,000,000 or less falls under Reg B.  As we all know because of this regulation we have to maintain proper records of when we received an application and when a decision on the application was made as well as communicated to the client. To keep yourself out of trouble, I recommend that there be a small business application form (paper or electronic) and that you have clearly stated the information required for a completed application in your small business application procedures. The form removes ambiguities in the application process and helps with the compliance documentation. One thing is for certain – when you request a personal credit bureau on the small business owner(s)/guarantor(s) and you currently do not have any credit exposure to the individual(s) – you have received an application and to this there is no debate. Bottom line is that you need to define your application and do so using objective criteria. Subjective criteria leaves room for interpretation and individual interpretation leaves doubt in the compliance area. Information requirements Whether or not you use a generic or custom small business scorecard or no scorecard at all, there are some baseline data segments that are important to collect on the small business applicant: ·         Requested amount and purpose for the funds ·         Collateral (if necessary based upon the product terms and conditions) ·         General demographics on the business o    Name and location o    Business Entity type (corporation, llc, partnership, etc.) o    Product and/or service provided o    Length of time in business o    Current banking relationship ·         General demographics on the owners/guarantors o    Names and addresses o    Current banking relationship o    Length of time with the business ·         External data reports on the business and/or guarantors o    Business Report o    Personal Credit Bureau on the owners/guarantors ·         Financial Statements (?) – we’ll talk about that in part II of this post. The demographics and the existing banking relationship are likely not causing any issues with anyone and the requested amount and use of funds is elementary to the process. Probably the greatest debate is around the collection of financial information and we are going to save that debate for the next post. The non-financial information noted above provides sufficient data to pull personal credit bureaus on the owners/guarantors and the business bureau on the actual borrower. We have even noted some additional data informing us the length of time the business has been in existence and where the banking relationship is currently held for both the business and the owners. But what additional information should be requested or should I say required? We have to remember that the application is not only to support the ability to render a decision but also supports the ability to document the loan and maybe even serve as a portion of the loan documentation.  We need to consider the following: ·         How standardized are the products we offer? ·         Do we allow for customization of collateral to be offered? ·         Do we have standard loan/fee pricing? ·         Is automatic debit for the loan payments required? Optional? Not available? ·         Are personal guarantees required? Optional? We again go back to the 80/20 rule. Product standardization is beneficial and optimal when we have high volumes and low dollars. The smaller the dollar size of the request/relationship the more standardized we need to have our products and as a result our application can be more streamlined. When we do not negotiate rate, we do not need to have a space to note requested rate. When we do not negotiate on personal guarantees we always require the personal financial information be collected on all owners of the business (some exceptions for very small ownership interests). Auto-debit for the loan payments means we always need to have some form of a DDA account with our institution. I think you get the point that for the highest volume of applications we standardize and thus streamline the process through the removal of ambiguity. Do you process an incomplete application? The most common argument for processing an incomplete application is that if we know we are going to decline the application based upon information on the personal credit bureau, why go through the effort of collecting and spreading the financial information. Two significant factors make this argument moot:   customer satisfaction and fair lending regulation. Customer satisfaction This is based upon the ease of doing business with the financial institution. More specifically the number of contact points or information requests that are required during the process. Ideally the number of contact points that are required once the applicant has decided to make a financing request should be minimal the information requirements clearly communicated up front and fully collected prior to rendering a decision. The idea that a quick no is preferable to submitting a full application actually is working to make the declination process more efficient than the actual approval process. So in other words we are making the process more efficient and palatable for those clients we do NOT consider acceptable versus those clients that ARE acceptable. Secondly, if we accept and process incomplete applications, we are actually mis-prioritizing the application volume. Incomplete applications should never be processed ahead of completed packages yet under the quick no objective, the incomplete application is processed ahead of completed applications simply based upon date and time of submission. Consequently we are actually incenting and fostering the submission of incomplete applications by our lenders. Bluntly this is a backward approach that only serves to make the life of the relationship manager more efficient and not the client. Fair lending regulation This perspective poses a potential issue when it comes to consistency.  In my 10 years working with hundreds of financial institutions, only a very small minority of times have I encountered a financial institution that is willing to state with absolute certainty that a particular characteristic will cause an application to e declined 100% of the time. As a result, I wish to present this scenario: ·         Applicant A provides an incomplete application (missing financial statements, for example). o    Application is processed in an incomplete status with personal and business bureaus pulled. o    Personal credit bureau has blemishes which causes the financial institution to decline the application o    Process is complete ·         Applicant B provides a completed application package with financial statements o    Application is processed with personal and business bureaus pulled, financial statements spread and analysis performed o    Personal credit bureau has the same blemishes as Applicant A o    Financial performance prompts the underwriter or lender to pursue an explanation of why the blemishes occurred and the response is acceptable to the lender/underwriter. Assuming Applicant A had similar financial performance, we have a case of inconsistency due to a portion of the information that we “state” is required for an application to be complete yet was not received prior to rendering the decision. Bottom line the approach causes doubt with respect to inconsistent treatment and we need to avoid any potential doubt in the minds of our regulators. Let’s go back to the question of financial statements. Check back Thursday for my follow-up post, or part II, where we’ll cover the topic in greater detail.

By: Joel Pruis The debate on what constitutes a small business application is probably second only to the ongoing debate around centralized vs. decentralized loan authority (but we will get to that topic in a couple of blogs later).  We have a couple of topics that need to be considered in this discussion, namely:      1.      When is an application an application?      2.     Do you process an incomplete application? When is an application an application? Any request by a small business with annual sales of $1,000,000 or less falls under Reg B.  As we all know because of this regulation we have to maintain proper records of when we received an application and when a decision on the application was made as well as communicated to the client.  To keep yourself out of trouble, I recommend that there be a small business application form (paper or electronic) and that you have clearly stated the information required for a completed application in your small business application procedures.  The form removes ambiguities in the application process and helps with the compliance documentation. One thing is for certain – when you request a personal credit bureau on the small business owner(s)/guarantor(s) and you currently do not have any credit exposure to the individual(s) – you have received an application and to this there is no debate. Bottom line is that you need to define your application and do so using objective criteria.  Subjective criteria leaves room for interpretation and individual interpretation leaves doubt in the compliance area. Information requirements Whether or not you use a generic or custom small business scorecard or no scorecard at all, there are some baseline data segments that are important to collect on the small business applicant: Requested amount and purpose for the funds Collateral (if necessary based upon the product terms and conditions) General demographics on the business Name and location Business Entity type (corporation, llc, partnership, etc.) Product and/or service provided Length of time in business Current banking relationship General demographics on the owners/guarantors Names and addresses Current banking relationship Length of time with the business External data reports on the business and/or guarantors Business Report Personal Credit Bureau on the owners/guarantors Financial Statements (??) – we’ll talk about that in part II of this post. The demographics and the existing banking relationship are likely not causing any issues with anyone and the requested amount and use of funds is elementary to the process.  Probably the greatest debate is around the collection of financial information and we are going to save that debate for the next post. The non-financial information noted above provides sufficient data to pull personal credit bureaus on the owners/guarantors and the business bureau on the actual borrower.  We have even noted some additional data informing us the length of time the business has been in existence and where the banking relationship is currently held for both the business and the owners.  But what additional information should be requested or should I say required? We have to remember that the application is not only to support the ability to render a decision but also supports the ability to document the loan and maybe even serve as a portion of the loan documentation.  We need to consider the following: How standardized are the products we offer? Do we allow for customization of collateral to be offered? Do we have standard loan/fee pricing? Is automatic debit for the loan payments required?  Optional? Not available? Are personal guarantees required?  Optional? We again go back to the 80/20 rule.  Product standardization is beneficial and optimal when we have high volumes and low dollars.  The smaller the dollar size of the request/relationship the more standardized we need to have our products and as a result our application can be more streamlined.  When we do not negotiate rate, we do not need to have a space to note requested rate.  When we do not negotiate on personal guarantees we always require the personal financial information be collected on all owners of the business (some exceptions for very small ownership interests).  Auto-debit for the loan payments means we always need to have some form of a DDA account with our institution.  I think you get the point that for the highest volume of applications we standardize and thus streamline the process through the removal of ambiguity. Do you process an incomplete application? The most common argument for processing an incomplete application is that if we know we are going to decline the application based upon information on the personal credit bureau, why go through the effort of collecting and spreading the financial information.  Two significant factors make this argument moot: customer satisfaction and fair lending regulation. Customer satisfaction This is based upon the ease of doing business with the financial institution.  More specifically the number of contact points or information requests that are required during the process.  Ideally the number of contact points that are required once the applicant has decided to make a financing request should be minimal the information requirements clearly communicated up front and fully collected prior to rendering a decision.  The idea that a quick no is preferable to submitting a full application actually is working to make the declination process more efficient than the actual approval process.  So in other words we are making the process more efficient and palatable for those clients we do NOT consider acceptable versus those clients that ARE acceptable.  Secondly, if we accept and process incomplete applications, we are actually mis-prioritizing the application volume.  Incomplete applications should never be processed ahead of completed packages yet under the quick no objective, the incomplete application is processed ahead of completed applications simply based upon date and time of submission.  Consequently we are actually incenting and fostering the submission of incomplete applications by our lenders.  Bluntly this is a backward approach that only serves to make the life of the relationship manager more efficient and not the client. Fair lending regulation This perspective poses a potential issue when it comes to consistency.  In my 10 years working with hundreds of financial institutions, only a very small minority of times have I encountered a financial institution that is willing to state with absolute certainty that a particular characteristic will cause an application to e declined 100% of the time.  As a result, I wish to present this scenario: Applicant A provides an incomplete application (missing financial statements, for example).  {C}Application is processed in an incomplete status with personal and business bureaus pulled. Personal credit bureau has blemishes which causes the financial institution to decline the application Process is complete Applicant B provides a completed application package with financial statements Application is processed with personal and business bureaus pulled, financial statements spread and analysis performed Personal credit bureau has the same blemishes as Applicant A Financial performance prompts the underwriter or lender to pursue an explanation of why the blemishes occurred and the response is acceptable to the lender/underwriter. Assuming Applicant A had similar financial performance, we have a case of inconsistency due to a portion of the information that we “state” is required for an application to be complete yet was not received prior to rendering the decision.  Bottom line the approach causes doubt with respect to inconsistent treatment and we need to avoid any potential doubt in the minds of our regulators. Let’s go back to the question of financial statements.  Check back Thursday for my follow-up post, or part II, where we’ll cover the topic in greater detail. 

By: Joel Pruis Part I – New Application Volume and the Business Banker: Generating small business or business banking applications may be one of the hottest topics in this segment at this time. Loan demand is down and the pool of qualified candidates seems to be down as well. Trust me, I am not going to jump on the easy bandwagon and state that the financial institutions have stopped pursuing small business loan applications. As I work across the country, I have yet to see a financial institution that is not actively pursuing small business loan applications. Loan growth is high on everyone’s priority and it will be for some time. But where have all the applicants gone? Based upon our data, the trend in application volume from 2006 to 2010 is as follows: Chart displays 2010 values: So at face value, we see that actually, overall applications are down (1,032 in 2006 to 982 in 2010) while the largest financial institutions in the study were actually up from 18,616 to 25,427. Furthermore the smallest financial institutions with assets less than $500 million showed a significant increase from 167 to 276. An increase of 65% from the 2006 levels! But before we get too excited, we need to look a little further. When we are talking about increasing application volume we are focusing on applications for new exposure or a new extension of credit and not renewals. The application count in the above chart includes renewals. So let’s take a look at the comparison of New Request Ratio between 2006 and 2010. Chart displays 2010 values: So using this data in combination with the total application count we get the following measurements of new application volume in actual numbers. So once we get under the numbers, we see that the gross application numbers truly don’t tell the whole story. In fact we could classify the change in new application volume as follows: So why did the credit unions and community banks do so well while the rest held steady or dropped significantly? The answer is based upon a few factors: In this blog we are going to focus on the first – Field Resources. The last two factors – Application Requirements and Underwriting Criteria – will be covered in the next two blogs. While they have a significant impact on the application volume and likely are the cause of the application volume shift from 2006 to 2010, each represents a significant discussion that cannot be covered as a mere sub topic. More to come on those two items. Field Resources pursuing Small Business Applications The Business Banker Focus. Focus. Focus. The success of the small business segment depends upon the focus of the field pursuing the applications. As we move up in the asset size of the financial institution we see more dedicated field resources to the Small Business/Business Banking segment. Whether these roles are called business bankers, small business development officers or business banking specialists, the common denominator is that they are dedicated to the small-business/ business banking space. Their goals depend on their performance in this segment and they cannot pursue other avenues to achieve their targets or goals. When we start to review the financial institutions in the less than $20B segment, the use of a dedicated business banker begins to diminish. Marketing segments and/or business development segmentation is blurred at best and the field resource is better characterized as a Commercial Lender or Commercial Relationship Manager. The Commercial Lender is tasked with addressing the business lending needs across a particular region. Goals are based upon total dollars generated and there is no restriction outside of the legal or in house lending limit of the specific financial institution. In this scenario, the notion of any focus on small business is left to the individual commercial lender. You will find some commercial lenders that truly enjoy and devote their efforts to the small business/business banking space. These individuals enjoy working with the smaller business for a variety of reasons such as the consultative approach (small businesses are hungry for advice while the larger businesses tend to get their advice elsewhere) or the ability to use one’s lending authority. Unfortunately while your financial institution may have such commercial lenders (one’s that are truly working solely in the small business or business banking segment) to change that individual’s title or formally commit them to working only in the small business/business banking segment is often perceived as a demotion. It is this perception that continues to hinder the progress of financial institutions with assets between $500 million and $20 billion from truly excelling in the small business/business banking space. Reality is that the best field resource to generate the small business/business banking application volume available to your financial institution is through the dedicated individual known as the Business Banker. Such an individual is capable of generate up to 250 applications (for the truly high performing) per year. Even if we scale this back to 150 applications in a given year for new credit volume at an average request of $106,929 (the lowest dollar of the individual peer groups), the business banker would be generating total application dollars of $16,039,350. If we imply a 50% approval/closure rate, the business banker would be able to generate a total of $8,019,675 in new credit exposure annually. Such exposure would have the potential of generating a net interest margin of $240,590 assuming a 3% NIM.   Not too bad.

By: Mike Horrocks Earlier this week, my wife and I were discussing the dinner plans for Thanksgiving.  The yams, cranberries, and pumpkin pies were purchased and the secret family recipes were pulled out of the cupboard.  Everything was ready…we thought.  Then the topic of the turkey was brought up.  In the buzz of work, family, kids, etc., both of us had forgotten to get the turkey.   We had each thought the other was covering this purchase and had scratched if off our respective lists.  Our Thanksgiving dinner was at risk!  This made me think of what best practices from our industry could be utilized if I was going to mitigate risks and pull off the perfect dinner.  So I pulled the page from the Basel Committee on Banking Supervision that defines operational risk as "the risk of loss resulting from inadequate or failed internal processes, people, systems or external events” and I have some suggestions that I think work for both your Thanksgiving dinner and for your existing loan portfolios. First, let’s cover “inadequate or failed processes”.  Clearly our shopping list process failed.   But how are your portfolio management processes?  Are they clearly documented and can they be implemented throughout the organization?  Your processes should be as well communicated and documented as the “Smashed Yam Bake” recipe or you may be at risk. Next, let focus on the “people and systems”.    People make mistakes – learn from them, correct them, and try to get the “systems” to make it so there are fewer mistakes.  For example, I don’t want the risk of letting the turkey cook too long, so I use a remote meat thermometer.  Ok, it is a little geeky; however the turkey has come out perfect every year.    What systems do you have in place to make your quarterly reviews of the portfolio more consistent and up to your standards?  Lastly, how do I mitigate those “external events”?  Odds are I will be able to still get a turkey tonight.  If not, I talked to a friend of mine who is a chef and I have the plans for a goose.   How flexible are your operations and how accessible are you to the subject matter experts that can get you out of those situations?  A solid risk management program takes into account unforeseen events and can make them into opportunities. So as the Horrocks family gathered in Norman Rockwell like fashion this Thanksgiving, a moment of thanks was given to the folks on the Basel committee.  Likewise in your next risk review, I hope you can give thanks for the minimized losses and mitigated risks.  Otherwise, we will have one thing very much in common…our goose will be cooked.

This first question in our five-part series on the FFIEC guidance and what it means Internet banking.  Check back each day this week for more Q&A on what you need to know and how to prepare for the January 2012 deadline. Question: What does “layered security” actually mean?   “Layered” security refers to the arrangement of fraud tools in a sequential fashion. A layered approach starts with the most simple, benign and unobtrusive methods of authentication and progresses toward more stringent controls as the activity unfolds and the risk increases. Consider a customer who logs onto an on-line banking session to execute a wire transfer of funds to another account. The layers of security applied to this activity might resemble: 1.       Layer One- Account log-in. Security = valid ID and Password must be provided 2.       Layer Two- Wire transfer request. Security= IP verification/confirmation that this PC has been used to access this account previously. 3.       Layer Three- Destination Account provided that has not been used to receive wire transfer funds in the past. Security= Knowledge Based Authentication Layered security provides an organization with the ability to handle simple customer requests with minimal security, and to strengthen security as risks dictate.  A layered approach enables the vast majority of low risk transactions to be completed without unnecessary interference while the high-risk transactions are sufficiently verified. _____________ Look for part two of our five-part series tomorrow. 

With the most recent guidance newly issued by the Federal Financial Institutions Examination Council (FFIEC) there is renewed conversation about knowledge based authentication. I think this is a good thing.  It brings back into the forefront some of the things we have discussed for a while, like the difference between secret questions and dynamic knowledge based authentication, or the importance of risk based authentication. What does the new FFIEC guidance say about KBA?  Acknowledging that many institutions use challenge questions, the FFIEC guidance highlights that the implementation of challenge questions can greatly impact efficacy of its usefulness. Chances are you already know this.  Of greater importance, though, is the fact that the FFIEC guidelines caution on the use of less sophisticated systems and information that can be easily guessed or obtained from an Internet search, given the amount of information available.    As mentioned above, the FFIEC guidelines call for questions that “do not rely on information that is often publicly available,” recommending instead a broad range of data assets on which to base questions.  This is an area knowledge based authentication users should review carefully.  At this point in time it is perfectly appropriate to ask, “Does my KBA provider rely on data that is publicly sourced”  If you aren’t sure, ask for and review data sources.  At a minimum, you want to look for the following in your KBA provider:     ·         Questions!  Diverse questions from broad data categories, including credit and noncredit assets ·         Consumer question performance as one of the elements within an overall risk-based decisioning policy ·         Robust performance monitoring.  Monitor against established key performance indicators and do it often ·         Create a process to rotate questions and adjust access parameters and velocity limits.  Keep fraudsters guessing! ·         Use the resources that are available to you.  Experian has compiled information that you might find helpful: www.experian.com/ffiec Finally, I think the release of the new FFIEC guidelines may have made some people wonder if this is the end of KBA.  I think the answer is a resounding “No.”  Not only do the FFIEC guidelines support the continued use of knowledge based authentication, recent research suggests that KBA is the authentication tool identified as most effective by consumers.  Where I would draw caution is when research doesn’t distinguish between “secret questions” and dynamic knowledge based authentication, which we all know is very different.   

By: Mike Horrocks Have you ever been struck by a turtle or even better burnt by water skies that were on fire?  If you are like me, these are not accidents that I think will ever happen to me and I'm not concerned that my family doctor didn't do a rotation in medical school to specialize in treating them. On October 1, 2013, however, doctors and hospitals across the U.S. will have ability to identify, log, bill, and track those accidents and thousands of other very specific medical events.  In fact the list will jump from a current 18,000 medical codes to 140,000 medical codes.  Some people hail this as a great step toward the management of all types of medical conditions, whereas others view it as a introduction of noise in a medical system already over burdened.  What does this have to do with credit risk management you ask? When I look at the amount of financial and non-financial data that the credit industry has available to understand the risk of our consumer or business clients, I wonder where we are in the range of “take two aspirins and call me in the morning” to “[the accident] occurred inside a chicken coop” (code: Y9272).   Are we only identifying a risky consumer after they have defaulted on a loan?  Or are we trying to find a pattern in the consumer's purchases at a coffee house that would correlate with some other data point to indicate risk when the moon is full? The answer is somewhere in between and it will be different for each institution.  Let’s start with what is known to be predictable when it comes to monitoring our portfolios - data and analytics, coupled with portfolio risk monitoring to minimize risk exposure - and then expand that over time.  Click here for a recent case study that demonstrates this quite successfully with one of our clients. Next steps could include adding in analytics and/or triggers to identify certain risks more specifically. When it comes to risk, incorporating attributes or a solid set of triggers, for example, that will identify risk early on and can drill down to some of the specific events, combined with technology that streamlines portfolio management processes - whether you have an existing system in place or in search of a migration - will give you better insight to the risk profile of your consumers. Think about where your organization lies on the spectrum.    If you are already monitoring your portfolio with some of these solutions, consider what the next logical step to improve the process is - is it more data, or advanced analytics using that data, a combination of both, or perhaps it's a better system in place to monitoring the risk more closely. Wherever you are, don’t let your institution have the financial equivalent need for these new medical codes W2202XA, W2202XD, and W2202XS (injuries resulting from walking into a lamppost once, twice, and sequentially).

By: Kari Michel The way medical debts are treated in scores may change with the introduction of June 2011, Medical Debt Responsibility Act. The Medical Debt Responsibility Act would require the three national credit bureaus to expunge medical collection records of $2,500 or less from files within 45 days of their being paid or settled. The bill is co-sponsored by Representative Heath Shuler (D-N.C.), Don Manzullo (R-Ill.) and Ralph M. Hall (R-Texas). As a general rule, expunging predictive information is not in the best interest of consumers or credit granters -- both of which benefit when credit reports and scores are as accurate and predictive as possible. If any type of debt information proven to be predictive is expunged, consumers risk exposure to improper credit products as they may appear to be more financially equipped to handle new debt than they truly are. Medical debts are never taken into consideration by VantageScore® Solutions LLC if the debt reporting is known to be from a medical facility. When a medical debt is outsourced to a third-party collection agency, it is treated the same as other debts that are in collection. Collection accounts of lower than $250, or ones that have been settled, have less impact on a consumer’s VantageScore® credit score. With or without the medical debt in collection information, the VantageScore® credit score model remains highly predictive.

As I’m sure you are aware, the Federal Financial Institutions Examination Council (FFIEC) recently released its, "Supplement to Authentication in an Internet Banking Environment" guiding financial institutions to mitigate risk using a variety of processes and technologies as part of a multi-layered approach. In light of this updated mandate, businesses need to move beyond simple challenge and response questions to more complex out-of-wallet authentication.  Additionally, those incorporating device identification should look to more sophisticated technologies well beyond traditional IP address verification alone. Recently, I contribute to an article on how these new guidelines might affect your institution.  Check it out here, in full:  http://ffiec.bankinfosecurity.com/articles.php?art_id=3932 For more on what the FFIEC guidelines mean to you, check out these resources - which also gives you access to a recent Webinar.

The following article was originally posted on August 15, 2011 by Mike Myers on the Experian Business Credit Blog. Last time we talked about how credit policies are like a plant grown from a seed. They need regular review and attention just like the plants in your garden to really bloom. A credit policy is simply a consistent guideline to follow when decisioning accounts, reviewing accounts, collecting and setting terms. Opening accounts is just the first step. Here are a couple of key items to consider in reviewing  accounts: How many of your approved accounts are paying you late? What is their average days beyond terms? How much credit have they been extended? What attributes of these late paying accounts can predict future payment behavior? I recently worked with a client to create an automated credit policy that consistently reviews accounts based on predictive credit attributes, public records and exception rules using the batch account review decisioning tools within BusinessIQ. The credit team now feels like they are proactively managing their accounts instead of just reacting to them.   A solid credit policy not only focuses on opening accounts, but also on regular account review which can help you reduce your overall risk.

By: Staci Baker In my last post about the Dodd-Frank Act, I described the new regulatory bodies created by the Act. In this post, I will concentrate on how the Act will affect community banks. The Dodd-Frank Act is over 3,000 pages of proposed and final rules and regulations set forth by the Consumer Financial Protection Bureau (CFPB). For any bank, managing such a massive amount of regulations is a challenge, but for a median-size bank with fewer employees, it can be overwhelming. The Act has far reaching unintended consequences for community banks.  According to the American Bankers Association, there are five provisions that are particularly troubling for community banks: 1.       Risk retention 2.       Higher Capital Requirements and Narrower Qualifications for Capital 3.       SEC’s Municipal Advisors Rule 4.       Derivatives Rules 5.       Doubling Size of the Deposit Insurance Fund (DIF) In order meet new regulatory requirements, community banks will need to hire additional compliance staff to review the new rules and regulations, as well as to ensure they are implemented on schedule. This means the additional cost of outside lawyers, which will affect resources available to the bank for staff, and for its customers and the community. Community banks will also feel the burden of loosing interchange fee income. Small banks are exempt from the new rules; however, the market will follow the lowest priced product. Which will mean another loss of revenue for the banks. As you can see, community banks will greatly be affected by the Dodd-Frank Act. The increased regulations will mean a loss of revenues, increased oversight, additional out-side staffing (less resources) and reporting requirements. If you are a community bank, how do you plan on overcoming some of these obstacles?