Credit Lending

The pendulum has swung again. The great recession brought a glacial freeze to access to capital. The thaw brought rapid, frictionless underwriting with an almost obsessive focus on growth and customer experience. Enter Marketplace Lenders and their more “flexible” approach to credit risk assessment. While much good has come from this evolution in financing, new challenges have surfaced – especially as it pertains to fraud prevention and credit risk management. Stacking has emerged as a particularly knotty problem in the small business lending space. Applicants have the opportunity to apply for and be approved for multiple loans in a matter of days or even hours.   Technology allows for underwriting that is at least somewhat automated and depositing often occurs within hours of approval. The speed of fulfillment is a boon for small businesses. However, it also makes it possible to be approved and draw down funds on multiple loans in quick succession. Core underwriting metrics, such as debt-to-income ratios and cashflow, are unreliable in the face of ratcheting debt from concurrent online business loans. This situation occurs because the window between the approval of the loan and delivery of the funds is much shorter than the timeframe to report the loan to credit reporting agencies and other third-party data suppliers. Not all lenders report small business loans, further compounding the problem.  Lenders’ risk and pricing strategies are hamstrung in the face of stacking, whether intentional on the part of the small business or not. If a struggling small business applies for credit and receives multiple loan offers, should we rely on their ability to resist the temptation to accept them all and use the funds wisely? No. The burden rests squarely on the credit provider to proactively address the problem. Technology-enabled frictionless underwriting underpins the online consumer loan space and facilitates a similar, yet subtly different stacking problem.  There are a large number of loan providers, with a spectrum of risk appetites and pricing strategies. This all but ensures that a consumer has access to additional loans at an ever-increasing interest rate. The underlying assumption, among the more mainstream, lower-rate providers, is that the consumer is disclosing all of their obligations – including any recent loans.  Although reporting in the consumer space is more robust and timely, it is still possible for an applicant to quickly access and draw funds on several loans within a very short timeframe, making it difficult for loan providers to get a full and complete picture of their capacity to repay the loan. The situation is further complicated by lenders at the higher risk, higher rate end of the market whose business models are structured to allow for, and perhaps even encourage, stacking by the consumer. Fortunately, there are a number of steps lenders can take to improve the situation: Contribute credit data to the credit reporting agencies. Know your customer, their industry, their market and underwrite appropriately. Develop a tailored underwriting approach that achieves a balance between frictionless customer experience and prudent credit and risk assessment. All applicants are not equal, and some require additional scrutiny and more time to underwrite. Understand the drivers and indicators of stacking. The latter point is worth emphasizing. The time to address stacking is prior to funding. This requires the lender to anticipate, identify and pre-empt stackers. There is no 100 percent foolproof remedy.  However, lenders can stack (pun-intended) the odds in their favor. For example, if an existing loan has a high balance and is delinquent, might that be an indicator of a propensity to stack? What if the business owner has applied for multiple loans, resulting in multiple inquiries, over a 45-day period? A proactive, data-driven anti-stacking strategy can yield positive results, reducing delinquency and losses. In combination with consistent comprehensive reporting to the bureaus, it can go a long way toward reducing the risk posed by this largely invisible threat.

As credit behavior and economic conditions continue to evolve, using a model that is validated regularly can give lenders greater confidence in the model’s performance. VantageScore® Solutions, LLC validates all its models annually to promote transparency and support financial institutions with model governance. The results of the most recent validation demonstrate the consistent ability of VantageScore® to accurately score more than 30 million to 35 million consumers considered unscoreable by other models — including 9.5 million Hispanic and African-American consumers. The findings reinforce the importance of using advanced credit scoring models to make more accurate decisions while providing consumers with access to fair and equitable credit. >> VantageScore® Annual Validation Results 2016 VantageScore® is a registered trademark of VantageScore Solutions, LLC  

A recent national survey by Experian revealed opportunities for businesses to build relationships with future homebuyers before they’re ready to obtain a loan. Insights include: 35% of future buyers said they don’t know what steps to take to qualify for a larger loan 75% of future buyers are not preapproved for a home loan 29% of those surveyed would purchase a more expensive home if they had better credit and could qualify for a larger loan A large portion of near-future homebuyers are millennials. Building relationships with this generation now will benefit financial institutions in the future. >> White paper: Building lasting relationships with millennials

 All customers are not created equally – at least when it comes to one’s ability to pay. Incomes differ, financial circumstances vary and economic challenges surface. Lost job. Totaled car. Unplanned medical bills. Life happens. Research conducted by a recent Bankrate study revealed  just 38 percent of Americans said they could cover an unexpected emergency room visit or a $500 car repair with available cash in a checking or savings account. It’s a scary situation for individuals, and also a source of stress for the lender expecting payment. So what are the natural moments for a lender to assess “ability to pay?” Moment No. 1: When prepping for a prescreen campaign and at origination. Many lenders leverage an income estimation model, designed to give an indication of the customer’s capacity to take on additional debt by providing an estimation of their annual income. Within the model, multiple attributes are used to calculate the income, including: Number of accounts Account balances Utilization Average number of months since trade opened Combined, all of these insights determine a customer’s current obligations, as well as an estimation of their current income, to see if they can realistically take on more credit. The right models and criteria on the front-end – whether used when a consumer applies for new credit or when a lender is executing a prescreen campaign to acquire new customers – minimizes the risk for default. It’s a no-brainer. Moment No. 2: When a customer is already on your books. As the Bankrate study mentioned, sudden life events can send some customers’ lives into a financial tailspin. On the other hand, financial circumstances can change for the better too. Aggressively paying down a HELOC, doubling down on a mortgage, or wiping out a bankcard balance could signal an opportunity to extend more credit, while the reverse could be the first signs of payment stress. Attaching triggers to accounts can give lenders indications on what to do with either scenario, helping to grow a portfolio and protect it. Moment No. 3: When an account goes south. While a lender hates to think any of its accounts will plummet into collections, sometimes, it’s inevitable. Even prime customers fall behind, and suddenly financial institutions are faced with looking at collections strategies. Where should they place their bets? You can’t treat all delinquent customer equally and work the accounts the same way. Collection resources can be wasted on customers who are difficult or impossible to recover, so it’s best to turn to predictive analytics and a collections scoring strategy to prioritize efforts. Again, who has the greatest ability to pay? Then place your manpower on those individuals where you can recover the most dollars. --- Assessing one’s ability to pay is a cornerstone to the financial services business. The quest is to find the sweet spot with a combination of application data, behavioral data and credit risk scoring analytics.  

His car, more than 10 years old and not worth salvaging, was in the shop again. Time to invest in something new – or at least “new-ish.” He headed to a local dealership, selected a practical model and applied for financing. “We can’t give you a loan,” said the manager. “Your income is not high enough, but perhaps if you bring in a co-signer ...” Denied. Her college degree hung on the wall of her childhood bedroom. In the months since she celebrated graduation with family and friends, she landed a job, but not one providing enough income to cover rent, a car payment and her hefty student loan payments. “I didn’t realize my payments would be so high,” said the woman. “I don’t know how I’ll ever climb out from under this debt and start my life.” Stalled. His attempt at applying for a bankcard, much needed to begin the journey of establishing credit in the country, was met with failure. “We can’t find any credit history on you,” says the lender. “Try again in the future.” Invisible. These stories are all too common in America. A lack of financial education, coupled with a few poor choices, can derail an individual’s financial trajectory. More light has certainly been shone on the topic of financial education and the importance of making smart credit decisions from a young age, but there is no nationwide financial education program offered in schools, and many parents feel ill-equipped to handle the task. Consider a few of these numbers: 71 percent of college grads recently surveyed by Experian said they did not learn about credit and debt management in college, giving their schools an average grade of “C” when it comes to preparing them to manage credit and debt after college The latest "State of Credit" revealed the average debt per consumer is $29,093 39 percent of newlyweds say credit scores is a source of stress in their marriage Money management is tough, and we expect people to just figure it out. But clearly, that’s not working. So we need to think about the world of credit differently. As Experian says, we need to treat it as a skill. We need to practice and learn and adjust. As you get better at credit, it opens doors, creates opportunities, and enables people to live the lives they wish to live. Suddenly, you can get the car loan, move out, have access to credit cards, and manage it all responsibly. In other words, you claim financial health. On the other hand, if you don’t work at this skill, a lack of financial health ensues. Unruly amounts of debt, irregular income and sporadic savings create stress, resentment and pain. Increasingly, more financial institutions are boosting efforts to educate about credit. Schools are exploring curriculum to talk finances and inject real-life money management scenarios into everyday lessons. Millennials are seeking transparency around credit transactions. The more financially healthy consumers we have in this country, building credit skills, means overall economies will grow. So yes, financial health matters. It matters to individuals, to lending institutions, to retailers and to communities big and small. Building those credit skills is essential. Your health depends on it.

According to a national survey by Experian, college students may be receiving their degrees, but their financial management knowledge still needs some schooling. The survey reveals some troubling data about recent graduates: Average student loan debt is $22,813 31% have maxed out a credit card 39% have accepted credit card terms and conditions without reading them Learning to manage debt and finances properly is key to young adults’ future financial success. Since students aren’t receiving credit and debt management education in college, they need to educate themselves proactively. Credit education resources are available on Experian's Website. >> Experian College Graduate Survey Report

Experian cited in Mobile Fraud Management Solutions report from Forrester as having the most capabilities and one of the highest estimated revenues in total fraud management

Experian consultant offers his recap from attending a half-day event hosted at The White House called the “FinTech Summit” largely focused on how government agencies can tap into the innovation, in which new firms are offering small-business owners and consumers faster forms of loans and digital payments. Federal regulators have been studying the industry to determine how it can be regulated while still encouraging innovation.

Part four in our series on Insights from Vision 2016 fraud and identity track It was a true honor to present alongside Experian fraud consultant Chris Danese and Barbara Simcox of Turnkey Risk Solutions in the synthetic and first-party fraud session at Vision 2016. Chris and Barbara, two individuals who have been fighting fraud for more than 25 years, kicked off the session with their definition of first-party versus third-party fraud trends and shared an actual case study of a first-party fraud scheme. The combination of the qualitative case study overlaid with quantitative data mining and link analysis debunked many myths surrounding the identification of first-party fraud and emphasized best practices for confidently differentiating first-party, first-pay-default and synthetic fraud schemes. Following these two passionate fraud fighters was a bit intimidating, but I was excited to discuss the different attributes included in first-party fraud models and how they can be impacted by the types of data going into the specific model. There were two big “takeaways” from this session for me and many others in the room. First, it is essential to use the correct analytical tools to find and manage true first-party fraud risk successfully. Using a credit score to identify true fraud risk categorically underperforms. BustOut ScoreSM or other fraud risk scores have a much higher ability to assess true fraud risk. Second is the need to for a uniform first-party fraud bust-out definition so information can be better shared. By the end of the session, I was struck by how much diversity there is among institutions and their approach to combating fraud. From capturing losses to working cases, the approaches were as unique as the individuals in attendance This session was both educational and inspirational. I am optimistic about the future and look forward to seeing how our clients continue to fight first-party fraud.

On June 2, the Consumer Financial Protection Bureau (CFPB) proposed a rule aimed at “payday lending” that will apply to virtually all lenders, with request for comments by Sept. 14. Here is a summary of the basic provisions of the proposed rule. However, with comments, the proposal is more than 1,300 pages in length, and the proposed rule and examples are more than 200 pages long. It is necessary to review the details of the proposed rule to understand its potential impact on your products and processes fully. You may wish to review your current and future offerings with your institution’s counsel and compliance officer to determine the potential impact if major provisions of this proposed rule are finalized by the CFPB. Coverage The proposal generally would cover two categories of loans. First, the proposal generally would cover loans with a term of 45 days or less. Second, the proposal generally would cover loans with a term greater than 45 days, provided that they have an all-in annual percentage rate greater than 36 percent and either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle. Ability to repay For both categories of covered loans, the proposal would identify it as an abusive and unfair practice for a lender to make a covered loan without reasonably determining that the consumer has the ability to repay the loan. Or if the lender does not determine if the consumer can make payments due, as well as meet major financial obligations and basic living expenses during and for 30 days after repayment. Lenders would be required to verify the amount of income that a consumer receives, after taxes, from employment, government benefits or other sources. In addition, lenders would be required to check a consumer’s credit report to verify the amount of outstanding loans and required payments. “Safe Harbor” The proposed rule would provide lenders with options to make covered loans without satisfying the ability-to-repay and payment notice requirements, if those loans meet certain conditions. The first option would be offering loans that generally meet the parameters of the National Credit Union Administration “payday alternative loans” program, where interest rates are capped at 28 percent and the application fee is no more than $20. The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less. The lender would have to refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year. Outstanding loans The proposal also would impose certain restrictions on making covered loans when a consumer has — or recently had — certain outstanding loans. These provisions are extensive and differ between short- and long-term loans. For example: Payday and single-payment auto title: If a borrower seeks to roll over a loan or returns within 30 days after paying off a previous short-term debt, the lender would be restricted from offering a similar loan. Lenders could only offer a similar short-term loan if a borrower demonstrated that their financial situation during the term of the new loan would be materially improved relative to what it was since the prior loan was made. The same test would apply if the consumer sought a third loan. Even if a borrower’s finances improved enough for a lender to justify making a second and third loan, loans would be capped at three in succession followed by a mandatory 30-day cooling-off period. High-cost installment loans: For consumers struggling to make payments under either a payday installment or auto title installment loan, lenders could not refinance the loan into a loan with similar payments. This is unless a borrower demonstrated that their financial situation during the term of the new loan would be materially improved relative to what it was during the prior 30 days. The lender could offer to refinance if that would result in substantially smaller payments or would substantially lower the total cost of the consumer’s credit. Payments Furthermore, it would be defined as an unfair and abusive practice to attempt to withdraw payment from a consumer’s account for a covered loan after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. The proposal would require lenders to provide certain notices to the consumer before attempting to withdraw payment for a covered loan from the consumer’s account unless exempt under one of the “safe harbor” options. Registered information systems Finally, the proposed rule would require lenders to use credit reporting systems to report and obtain information about loans made under the full-payment test or the principal payoff option. These systems would be considered consumer reporting companies, subject to applicable federal laws and registered with the CFPB. Lenders would be required to report basic loan information and updates to that information. The proposed regulation may be found here.

According to the most recent State of the Automotive Finance Market report, the total balance of open automotive loans increased 11.1% in Q1 2016, reaching $1.005 trillion — up from $905 billion in Q1 2015. This is the first time on record that automotive loans have passed the $1 trillion mark. The report also revealed that subprime loan volumes experienced double-digit growth and overall delinquencies remained low. With more consumers relying on financing, lenders should monitor credit and delinquency trends in order to adjust strategies accordingly. >>Webinar: Hear about the latest consumer credit trends

As net interest margins tighten and commercial real estate concentrations begin to slowly creep back to 2008 levels, financial institutions should consider looking to their branch networks to drive earnings. Why wouldn’t you, right? The good news is branch networks can embrace that challenge by simply using some of the tools they already have access to – most notably the credit report. Credit reports are generally seen as a tool to assist financial institutions in assessing credit risk. However, if used properly, credit reports can provide a wealth of insight on selling opportunities as well. Typically when a customer’s credit report is pulled, the personal banker or customer service representative is primarily focused on whether or not a loan application is approved based on the institution’s approval parameters. Instead, what if a lender elected to view this customer interaction as an opportunity to deepen the relationship? So, here are three ways to utilize credit reports to generate earnings through retail loan growth: 1. Opportunities to Consolidate Debt  Looking for debt consolidation opportunities is probably the simplest way to mine for opportunities. For example: Personal Banker: “It looks like you also have a card credit with XYZ and ABC Bank. Based on your application, we can consolidate both of those balances into one and give you a lower interest rate.” Be specific. Tell the customer exactly how much money per month they would be able to save and the benefits of consolidation. Not to mention, debt consolidation often reduces a lender’s credit risk and enhances customer loyalty, so this is a win for the institution as well. 2. Opportunities to Provide Additional Credit  Another method would be to “soft pull” a segment of your portfolio to identify customers who qualify for larger credit card balances or refinance opportunities. This strategy is best executed at the portfolio management level, as insight is needed on the bank risk appetite and concentration levels. Layering on a basic prescreen helps qualify and segment your prospect list according to your unique credit criteria. You can also expand the universe with an Experian extract list, identifying new consumers who might be open to new offers. 3. Find Hidden Opportunities Credit scoring models are not perfect. There are times when a person’s credit score does not reflect an applicant’s true risk profile. For example, a person who was temporarily out of work may have missed two to three payments during that period. A deeper scan of the credit report during underwriting may reveal an opportunity to lend to a person rebounding from financial difficulties not yet reflected by their credit score. For example, this individual may have missed two credit card payments but hasn’t missed a mortgage or car payment in 20 years. A score is just one dimension to the story, but trended insights can shine a light on who best to lend to in the future. Conclusion: With the proper tools and training, your retail team can get more out of the basic credit report and find additional opportunities to deepen customer relationships while maintaining your desired risk profile. The credit report can be a workhorse for your team, so why not leverage it for more business. Note: The information above outlines several uses for a credit report.  Separate credit reports are required for each use with the intended permissible purpose. Ancin Cooley is principal with Synergy Bank Consulting, a national credit risk management and strategic planning firm. Synergy provides a rangeof risk management services to financial institutions, which include loan reviews, IT audits, internal audits, and regulatory compliance reviews. As principal, Ancin manages a growing portfolio of clients throughout the United States.

It’s more than mercury that will be up this summer. As temperatures climb, so do automotive sales, which often reach annual highs during the warmest months of the year. Fueled by pent-up demand coming out of the recession, historically low interest rates, and increased competition among both manufacturers and lenders, auto sales are continuing to be a bright spot in the U.S. economy. Summer sales spike According to recent research by Experian Automotive, 2015 sales of new non-luxury vehicles began rising in May and peaked in August at nearly 20 percent above the monthly average for the year. It is not surprising, given the number of notable manufacturer marketing campaigns that often air through the summer months, beginning with Memorial Day and running all the way through Labor Day weekend. The projection is that this trend will continue in 2016. Financing moves metal Financing continues to play an important role in facilitating new car sales. Experian research shows a consistent increase in the percentage of new vehicles sold with financing with the trend reaching a period high of 85.9 percent in Q4 2015, a 2.3 percent increase over the previous year. The increased financing, is due in part, to continued post-recession liquidity. As the economy has rebounded, lenders have re-emerged with attractive financing rates for buyers. In addition, captive lenders are continuing to support manufacturers with 0 percent subvention offers to increase sales. Total loan value is on the rise as well, reaching $29,551 in Q4 2015, a 4.1 percent increase over the previous year. Average MSRP is trending up too, but at a slower year-over-year rate of 3.6 percent. The slower growth in MSRP relative to total loan value is leading to increased loan-to-value ratios which reached 109.4 percent in Q4 2015. The increases in loan value and MSRP are putting pressure on monthly payment with average new vehicle payments reaching $493 per month on new loans in the fourth quarter. Seeking relief, consumers are turning to longer loan terms and leasing to maintain lower payments. As a result, average new vehicle loan terms ticked slightly higher to 67 months while lease penetration on new vehicles reached 28.9 percent, a 19 percent increase over the previous year. Leveraging the trends Timing is everything when it comes to auto lending. Direct mail remains an effective communication tool for lenders, but mass mailers without regard to response rates yield poor ROIs and put future campaigns in jeopardy. Targeting consumers who are most likely to be in the market at a point in time can increase response rates and improve overall campaign performance. Experian’s In the Market Model – Auto leverages the power of trended credit data to identify consumers that will be most receptive to an offer. By focusing on high-propensity consumers, lenders can conduct more marketing campaigns during the year with the same budget and achieve supercharged results. Context-based marketing allows lenders to tailor offers by leveraging insights on a consumer’s existing loans. Product offers can additionally be customized based on estimated interest rates, months remaining, or current loan balance on open auto loans. Targeted refinance offers can also be delivered to consumers with high interest rates or focus new-loan offers on consumers with minimal months or balance remaining on existing loans. Understanding current auto loans allows lenders to target offers that are relevant to their prospects and gain an advantage over the competition. Increases in loan-to-value (LTV) ratios at origination and longer loan terms are putting many consumers in deep negative equity positions. As a result, many consumers will not qualify for refinance offers without significant down payments leading to low underwriting conversion rates and poor customer experience. Lenders seeking to improve on these metrics should leverage Experian’s Auto Equity Model, which provides an estimate of the amount of equity a consumer has in their existing auto trades. Focusing refinance offers on consumers with negative equity, while suppressing those with deep negative positions, can help improve response rates while minimizing declines due to LTV requirements. Takeaways Lenders should be gearing up for the summer auto sales spike. Proactive strategies will allow savvy marketers to deploy capital and grow their portfolio by taking advantage of customer insight. Timing and context matter, and as auto sales trends reveal, now is the opportune time to optimize marketing efforts and capitalize on the season.

More home buyers and sellers tend to enter the market in the warmer months, making spring and summer a busy season for mortgage brokers and lenders seeking to close deals and work through the mounds of paperwork associated with a home purchase. In April, the number of existing homes sold shot up 4.9 percent year-over-year, to 471,000 purchases across the United States, according to a recent report from the National Association of Realtors®. And sales were up 11.9 percent in April from March. With the belief that mortgage rates will finally start to climb in the coming months, fence-sitters will likely make a move this summer in order to capitalize on attractive rates, creating a healthy home-buying season. On average, it takes 45 days to close a home loan, and anyone going through that process will admit the process can cause stress, anxiety and uncertainty. In fact, a recent study ranked buying a home as the No. 1 most stressful experiences in modern life with 69 percent calling it “stressful.” There are so many tollgates along the journey. Will the consumer qualify for a mortgage? Will the home appraise at the right price? Does the home pass inspection? Are there contingencies that can suddenly halt the sale? Will the seller or buyer get cold feet and send weeks of work down the drain? Of course there are many factors people can’t control as they seek to land their next home, but there are ways both the consumer and lender can work together to smooth out the process and endure the average 45-day closing period. Getting pre-approved for a home loan is obviously the ideal, with consumers understanding their credit score, existing financial obligations and the type of loan they can qualify for, as well as money required at closing. Increasingly, borrowers know the impact credit can have on their home-buying experience. A 2016 Experian study revealed: 93 percent of consumers reported “one’s credit score is important in purchasing a home” 48 percent stated “they are working to improve their credit to qualify for a better home rate” 34 percent of future first-time buyers say “their credit might hurt their ability to purchase a home” In this competitive market, low fees and interest rates drive consumers’ business. However, credit circumstances such as high debt-to-income ratios, too many open trades, or high balances may inhibit lenders or mortgage brokers from offering favorable terms, or even approving a loan altogether. In these scenarios, consumers may qualify for better loan terms simply by paying down debt. Lenders or brokers can assist their customer in rapidly refreshing, re-scoring, or correcting information on their credit report in one to two business days. This step can obviously help consumers, but also benefit lenders by retaining credit applicants before they pursue competitive offerings. Occasionally errors may pop up on a consumer’s credit report – an outdated trade line or inaccuracy – which can also impact the home-buying process. Consumers have the ability to file a dispute with the credit bureaus or their lender directly, and those disputes must be addressed within 30 days. However, if a loan process is already underway, mortgage brokers and lenders can help expedite the process by using a product like Experian’s Express Request™ to facilitate dispute resolution in 48 hours. Quickly addressing an inaccuracy benefits the home buyer, but also the lender who is likely working to close a number of loans during the busy spring and summer months. Without a doubt, the documentation process surrounding a home purchase is intense, but if all parties come to the table quickly with the requested items and verification, the process can be smoother. And then the stress can turn to scheduling moving vans and packing …

A recent study shows that small-business credit conditions remained relatively unchanged in Q1 2016, as delinquency and bankruptcy rates held steady at low levels. Much of the slight decrease in delinquencies was driven by fewer small businesses falling within the 61 to 90 and 91+ days past-due categories. Gaining deeper insight into the health of small businesses is important for both lenders and small-business owners. Experian® provides market-leading tools that enable small businesses to find new customers, process new applications, manage customer relationships and collect on delinquent accounts. >> Q1 2016 report