In recent months, the topics of stress-testing and loss forecasting have been at the forefront of the international media and, more importantly, at the forefront of the minds of American banking executives. The increased involvement of the federal government in managing the balance sheets of the country’s largest banks has mixed implications for financial institutions in this country. On one hand, some banks have been in the practice of building macroeconomic scenarios for years and have tried and tested methods for risk management and loss forecasting. On the other hand, in financial institutions where these practices were conducted in a less methodical manner, if at all, the scrutiny placed on capital adequacy forecasting has left many looking to quickly implement standards that will address regulatory concerns when their number is called. For those clients to whom this process is new, or for those who do not possess a methodology that would withstand the examination of federal inspectors, the question seems to be – where do we begin? I think that before you can understand where you’re going, you must first understand where you are and where you have been. In this case, it means having a detailed understanding of key industry and peer benchmarks and your relative position to those benchmarks. Even simple benchmarking exercises provide answers to some very important questions. • What is my risk profile versus that of the industry? • How does the composition of my portfolio differ from that of my peers? • How do my delinquencies compare to those of my peers? How has this position been changing? By having a thorough understanding of one’s position in these challenging circumstances, it allows for a more educated foundation upon which to build assessments of the future.  

By: Kari Michel Are you using scores to make new applicant decisions? Scoring models need to be monitored regularly to ensure a sound and successful lending program. Would you buy a car and run it for years without maintenance — and expect it to run at peak performance? Of course not. Just like oil changes or tune-ups, there are several critical components that need to be addressed regarding your scoring models on a regular basis. Monitoring reports are essential for organizations to answer the following questions: • Are we in compliance? • How is our portfolio performing? • Are we making the most effective use of your scores? To understand how to improve your portfolio performance, you must have good monitoring reports. Typically, reports fall into one of three categories: (1) population stability, (2) decision management, (3) scorecard performance. Having the right information will allow you to monitor and validate your underwriting strategies and make any adjustments when necessary. Additionally, that information will let you know that your scorecards are still performing as expected. In my next blog, I will discuss the population stability report in more detail.

By: Tracy Bremmer It’s not really all about the credit score. Now don’t get me wrong, a credit score is a very important tool used in credit decision making; however there’s so much more that lenders use to say “accept” or “decline.” Many lenders segment their customer/prospect base prior to ever using the score. They use credit-related attributes such as, “has this consumer had a bankruptcy in the last two years?” or “do they have an existing mortgage account?” to segment out consumers into risk-tier buckets. Lenders also evaluate information from the application such as income or number of years at current residence. These types of application attributes help the lender gain insight that is not typically evaluated in the traditional risk score. For lenders who already have a relationship with a customer, they will look at their existing relationships with that customer prior to making a decision. They’ll look at things like payment history and current product mix to better understand who best to cross-sell, up-sell, or in today’s economy, down-sell. In addition, many lenders will run the applicant through some type of fraud database to ensure the person really is who they say they are. I like to think of the score as the center of the decision, with all of these other metrics as necessary inputs to the entire decision process. It is like going out for an ice cream sundae and starting with the vanilla and needing all the mix-ins to make it complete.