Tag: FICO Resilience Index

The current pandemic will affect the way financial institutions lend and provide credit. Shawn Rife, Experian’s Director of Product Scoring, discusses the ways that financial institutions can navigate the COVID-19 crisis. Check out what he had to say: What implications does the global pandemic have on financial institutions’ analytical needs?  SR: In the customer lifecycle, there are 4 different stages: prospecting, acquisitions, portfolio management, and collections. During times of economic uncertainty, lenders typically take additional actions to ensure that there’s a first line of defense against delinquencies and payment stress. Expanding their focus to incorporate account review/portfolio management becomes particularly important. During this time, clients will be looking for leadership, early warning signs, and ways to recession-proof their portfolios (account management), while growing and maintaining their approvals in a healthy way (originations). Lenders may be well advised to delay any focus on collections, since many consumers may be facing major payment stress through no mismanagement of their own doing. Another critical component is with the rollout of government stimulus packages, which lenders can use to identify people in stress who could benefit for second chance opportunities they may not have otherwise been able to receive. As more consumers seek credit, from an analytics perspective, what considerations should financial institutions be making during this time?  SR: Financial institutions should be assessing and pre-identifying situations that might place consumers in positions of elevated financial stress. That way, organizations can implement solutions to identify and help at-risk consumers before they fall delinquent. The recent Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – coupled with Experian’s score treatment, are designed to protect consumers against score declines during times of crisis. Furthermore, lenders can provide forbearance and loan deferment programs to help consumers.  For lenders, credit risk scores, models, and attributes are the best ways to identify – and even predict - delinquency risk. The FICO® Resilience Index can also identify consumers who are particularly susceptible to delinquency risk directly due to macroeconomic uncertainty. This gives lenders the opportunity to evaluate their portfolios for loss and connect with consumers who may be in need of further support. What is the smartest next play for financial institutions?  SR: For financial institutions, the smart play is to add alternative data into their data-driven decisioning strategies as much as possible. Alternative data works to enhance your ability to see a consumer’s entire credit portfolio, which gives lenders the confidence to continue to lend – as well as the ability to track and monitor a consumer’s historical performance (which is a good indicator of whether or not a consumer has both the intention and ability to repay a loan). How will the new attribute subset list benefit financial institutions during this time?   SR: Experian’s series of crisis attributes is an example of attributes that can be predictive in times of a crisis. These lists were designed to follow the 3 E’s – Expand, Enhance, and provide Ease of use. Enhance – With these attributes, lenders aren’t limited to traditional data. These attributes allow lenders to look at the entirety of a consumer’s credit or repayment behavior and use more data to make better lending decisions. This becomes crucial in a challenging environment. Expand – This data can also help lenders identify consumers who are in the market for products and services, even if there the lending criteria becomes more stringent. This can open doors and new opportunities for 40-50 million new customers, particularly ones that may not fit initial lending criteria. Ease of Use – Experian has put together the most predictive elements that can identify consumer resilience and potential financial stress in this challenging economy. Experian is committed to helping your organization during times of uncertainty. For more resources, visit our Look Ahead 2020 Hub. Learn more Shawn M. Rife, Director of Risk Scoring, Experian Consumer Information Services, North America Shawn Rife manages Experian’s credit risk scoring models, focused on empowering clients to maximize the scope and influence of their lending universe - while minimizing risk - and complying with ever-changing regulatory standards. Shawn also leads the implementation of Alternative Data within the lending environment, as well as key product implementation initiatives. Prior to Experian, Shawn held key consumer insights and predictive analytics roles for Consumer Packaged Goods and internet companies. Over his career, Shawn has focused on market segmentation, competitive research, new product development and consumer advocacy. He also holds a Master’s degree from Harvard University and a Bachelor’s degree in Political Science and Economics.

In the face of severe financial stress, such as that brought about by an economic downturn, lenders seeking to reduce their credit risk exposure often resort to tactics executed at the portfolio level, such as raising credit score cut-offs for new loans or reducing credit limits on existing accounts. What if lenders could tune their portfolio throughout economic cycles so they don’t have to rely on abrupt measures when faced with current or future economic disruptions? Now they can. The impact of economic downturns on financial institutions Historically, economic hardships have directly impacted loan performance due to differences in demand, supply or a combination of both. For example, let’s explore the Great Recession of 2008, which challenged financial institutions with credit losses, declines in the value of investments and reductions in new business revenues. Over the short term, the financial crisis of 2008 affected the lending market by causing financial institutions to lose money on mortgage defaults and credit to consumers and businesses to dry up. For the much longer term, loan growth at commercial banks decreased substantially and remained negative for almost four years after the financial crisis. Additionally, lending from banks to small businesses decreased by 18 percent between 2008-2011. And – it was no walk in the park for consumers. Already faced with a rise in unemployment and a decline in stock values, they suddenly found it harder to qualify for an extension of credit, as lenders tightened their standards for both businesses and consumers. Are you prepared to navigate and successfully respond to the current environment? Those who prove adaptable to harsh economic conditions will be the ones most poised to lead when the economy picks up again. Introducing the FICO® Resilience Index The FICO® Resilience Index provides an additional way to evaluate the quality of portfolios at any point in an economic cycle. This allows financial institutions to discover and manage potential latent risk within groups of consumers bearing similar FICO® Scores, without cutting off access to credit for resilient consumers. By incorporating the FICO® Resilience Index into your lending strategies, you can gain deeper insight into consumer sensitivity for more precise credit decisioning. What are the benefits? The FICO® Resilience Index is designed to assess consumers with respect to their resilience or sensitivity to an economic downturn and provides insight into which consumers are more likely to default during periods of economic stress. It can be used by lenders as another input in credit decisions and account strategies across the credit lifecycle and can be delivered with a credit file, along with the FICO® Score. No matter what factors lead to an economic correction, downturns can result in unexpected stressors, affecting consumers’ ability or willingness to repay. The FICO® Resilience Index can easily be added to your current FICO® Score processes to become a key part of your resilience-building strategies. Learn more