Credit Lending
By: Mike Horrocks A recent industry survey was published that called out the number one reason that lenders were dissatisfied or willing to go to another financial institution (and take their book of business with them) was not compensation. While, compensation is often thought of as the number one driver for this kind of change in your bench of lenders, it had much more to do with being able to serve customers efficiently. One of the key reasons that lenders were unhappy was that they were in a workflow and decisioning process where the lender could not close loans on time, putting stress on the loan officer\'s relationships and destroying borrower confidence. Thinking of my own experiences as a commercial lender, my interactions with the private bankers, branch managers, and lenders that served every kind of customer, I would absolutely have to agree with this study. Nothing is more disheartening then working on bringing in a client, and then having the process not give me a response in the time that my clients are expecting or that the completion is achieving. Automation in the process is the key. While lenders still will need to be engaged in the process and paying attention to the relationship, it can be significantly refocused to other parts of the business. This leads to benefits such as: Protecting the back office and the consistence of booking and servicing loans. Ensuring that the risk appetite is consistent for the institution for every deal. Growing a portfolio of loans that can and will adhere to sound portfolio management techniques. So how is your process supporting lenders? Are you automating to help in areas that give you a competitive advantage with robust credit scores, decision strategies or risk management solutions that are helping close deals quickly or are you requiring a process that is keeping them from bringing more customers (and profits) in the door? Henry Ford is credited to say, “Coming together is a beginning. Keeping together is progress. Working together is success.” Take a closer look at your lending process. Do you have the tools that help bring your lenders, your customers, and your organization together? If you don’t you may be losing some of your best talent for loan production at a time when you can least afford it.
By: Maria Moynihan At a time when people are accessing information when, where and how they want to, why aren’t voter rolls more up to date? Too often, voter lists aren’t scrubbed for use in mailing, and information included is inaccurate at the time of outreach. Though addresses and other contact information becomes outdated, new address identification and verification has not typically been a resource focus. Costs associated with mandated election-related communications between government and citizens can add up, especially if messages never get to their intended recipients and, in turn, Registrar Offices never get a response. To date, the most common pitfalls with poorly maintained lists have been: Deceased records — where contact information for deceased voters has not been removed or flagged for mailing Email and address errors — where those who have moved or recently changed information failed to update their records, or where errors in the information on file make it unlikely for the United States Postal Service® to reach individuals effectively Duplicate records — where repeat records exist due to update errors or lack of information standardization With resources being tighter than ever, Registrar Offices now are placing emphasis on mailing accuracy and reach. Through third-party-verified data and advanced approaches to managing contact information, Registrar Offices can benefit from truly connecting with their citizens while saving on communication outreach efforts. Experian Public Sector recently helped the Orange County Registrar of Voters increase the quality of its voter registration process. Click here to view the write-up, or stay tuned as I share more on progress being made in this area across states.
One of the challenges that we hear from many of our clients is managing multiple collection agencies in order to recover bad debts. Collection managers who use multiple collection agencies recognize the potential upside to utilizing multiple agencies. Assigning allocate accounts to different agencies based on geography, type of account, status of account (such as a skip), first, second or third placement, and other factors may lead to greater recoveries than just using a single agency. Also, collection managers recognize the advantage of pitting agencies against each other in a positive manner to achieve significantly better results. However this can present a challenge in that the more agencies collection managers use, the greater the risk of losing operational control. Here are some questions to ask before engaging in a multiple collection agency strategy: Do you know which agency has which accounts? Were some accounts accidently assigned to more than one agency? Is it easy to locate an account with an agency if it needs to be withdrawn from it? Is information flowing from one agency to another if agencies are used for second and third placements? Managing multiple agencies can get complex pretty quickly, but rather than just using one agency to avoid these complexities, there is an alternative to consider: Loss of control can be overcome with effective systems that allocate and manage accounts assigned to multiple agencies. These systems allow for the allocation, recall, activity tracking, performance reporting, and commission calculations or vendor audits. No more spreadsheets or other time consuming, error prone manual processes. Experian can help with its agency allocation and management solutions through Tallyman Agency Allocation. Learn more about our Tallyman Agency Allocation software.
By: Mike Horrocks Note: As we wrap our 3-part blog coverage of the American Banker webinar, “What’s next for mobile banking?”, we focus on the comments from Cherian Abraham and a great question on wearable devices. Experian - What\'s Next for Mobile Banking from Experian Decision Analytics It is amazing to me as you look at the world, science, families, etc., how often there are polar opposites that just never seem to come together. Cats and dogs and little brothers and sisters are just a few that I see on a daily basis it seems like. But I have hope for unity at last and that comes from mobile banking. Let me explain… Thanks to mobile devices, banks are in a golden era where they can have access 24/7 to their clients and prospects. Sitting on a couch, watching the latest hit show, a consumer can now have a banking experience - couch potatoes that need banking rejoice! And by partnering with the right team you can ensure that in every transaction: The offer is relevant and that the onboarding is frictionless, while maintain the risk appetite of the bank. The consumer and the device are authenticated and that all KYC issues are addressed. That the relationship and the value proposition of the bank are tied together meaningfully to help influence the future of additional transactions. Also thanks to mobile, wearable and fitness devices have a place in this process as well. While really appealing to the tech leader, we do need pause to find the use case – with payments often coming to the top. So how long will it be until we are at the point that while out jogging you can also pick up your morning coffee with a bump and pay from the fitness device? So while we are still looking for the use case to make sure value is right, I can see where the fitness device wearer gets their banking needs fulfilled as well in the near future. So back to my first point: of hope for unity and cats living with dogs. Thanks to mobile we have an ecosystem that allows us to have the person on the couch and the person on the run all being serviced – unity via mobile banking.
By: Mike Horrocks Last week I had a friend of mine (who would be a self-declared geek) go to GenCon in Indianapolis. For those that don’t know anything about GenCon, it is one of the largest gaming conventions in the world and it is the only time that you can expect to see everyday folks dressed up as superheroes or gaming icons walking the streets. I noticed however as he was sharing his photos that among the hundreds of Batmen, Supermen, and Wonder Women there were not many sidekicks. Now imagine what would Batman be like without Alfred, his trusty butler, friend, and guy who keeps the Bat-mobile running? So hold that thought and now think about your customers. They are your superhero. They help you hit your goals…but are you more than just a bank to them? So as part 2 of our follow up on the American Banker webinar, “What’s next for mobile banking”, I want to talk about some of the key points that Dominic Venturo, the chief innovation officer for US Bank covered, specifically about the role your financial institution can have in the life of your bank customers. Your customers are consumers. In the normal process of all things consumer they are constantly: Becoming aware of products in the market place Searching and evaluating offers Deciding and purchasing Experiencing moments that will create loyalty (or not) Triggering or receiving offers to start the process again So ask yourself, are you more than just a banker? Have you helped your customers in the process of picking the best value for them up to the point of spending that savings or needing credit? Or once the transaction is complete, have you been able to create a memorable experience or help that kind of transaction happen again? US Bank is doing a great job, as Dominic showed with its Peri app in being a part of that process and extending the role of the bank with the consumer. Just like Alfred was always tinkering or helping with the next Bat-gadget, great bankers will be working with, adapting to, and creating the next mobile experience. There are great organizations out there already that are helping remove the friction of the mobile space in actions like account acquisition, with Mitek and their driver license scanning to account opening apps. Is there an opportunity for you to add that function (or maybe something else) to the utility belt for your bank? So again consider what your role is for your customers. Can you be more than a banker to them? Where can you help them in the consumer process to add more value to their life? What kind of sidekick are you to your customer/your superhero? Or maybe even more important, does your customer feel like you are their superhero?? Next week we wrap up the mobile webinar series…until then.
by John P. Robertson, Senior Business Process Specialist As a Senior Business Process Specialist for the Experian Decision Analytics, John provides guidance to clients in the areas of profitability strategies for risk based pricing and relationship profitability. He assists banks in developing and implementing successful transitions for commercial lending that improve both the financial efficiency of the lending process and the productivity of the lending officers. John has 26 years of experience in the banking industry, with prior background in cash, treasury, and asset /liability management. For quite some time now, the banking industry has experienced a flat funding curve. Very small spreads have existed between the short and long term rates. Slowly, we have begun to see the onset of a normalized curve. At this writing, the five year FHLB Advance rate is about 2.00%. A simplistic view of loan pricing looks something like this: + Interest Income + Non-Interest Income - Cost of Funds - Non-Interest Expense - Risk Expense = Income before Tax The example is pretty simple and straight forward, “back of the napkin” kind of stuff. We back into a spread needed to reach breakeven on a five year fixed rate loan by using the UBPR (Uniform Bank Performance Report) national peer average for Non-Interest Expense of approximately 3.00%. You would need a pre-tax rate requirement of 5.00% before you consider the risk and before you make any money. If you tack on 1.00% for risk and some kind of return expectation, the rate requirement would put you around a 6.00% offering level. From a lender’s perspective, a 6.00% rate on a minimal risk five year fixed rate loan doesn’t exist. They might as well go home. CFO’s have been asking themselves, “What do we do with this excess cash? We get such a paltry spread. How can we put higher yielding loans on our books at today’s competitive rates? We’ve got plenty of capital even with the new regulation requirements so can we repo the securities and use the net spread for our cost of funds?” Leveraging the excess cash and securities in order to meet the pressing rate demands may be a way banks have been funding selective loans at such low rates on highly competitive, quality loan originations of size. But you have to wonder, what about that old adage, “You don’t short fund long term loans.” Won’t you eventually have to deal with compression and “margin squeeze”? Oh and by the way, aren’t you creating a mismatch in the balance sheet which requires explanation. Are they buying a swap to extend the maturity? If so, are they really making their targeted return? If this is what they are doing, why not just accept a lower return but one that is better than the securities? Share your thoughts with me.
By: Mike Horrocks Last week, I spoke to you about an American Banker webinar that Experian hosted on “What is next for mobile banking”. Hopefully you were able to attend, but for those that could not, I promised we would cover a few of the key points. So here we go. I just sent my youngest off to Kindergarten this week and along with the excitement about a new teacher, new friends, and of course recess comes the anxiety of a new building, a new routine and all that comes with change. As I saw my little guy getting nervous, his big 4th grade brother came over and reminded him that he would be his buddy and help him around the school that first day. This made me think about the mobile space. I am sure that there are a lot of readers that are excited to have an app on a smartphone that they can show their friends over drinks, but along with that excitement comes the fear of maybe not knowing all they don’t know in the mobile space and the risks that could come from that. They need a buddy. They need a trusted business partner. In the American Banker webinar, Gordon Baird of nD bancgroup called out just how important the right collaboration and partnership is for a financial institution looking to go into or expand their mobile banking footprint. Mutually beneficial partnerships that provide value beyond the typical mobile experience is what will retain mobile banking clients. Baird said it best as he explained, \"Cooperation is a competitive advantage.\" So when you are looking at your mobile banking strategies ask yourself: Is my approach an individual effort? If it is a solo effort, who can I bring to the table? What are the points in my customer’s mobile experience that I cannot optimize? Who can I partner with that can optimize the customer’s mobile experience? Do I have the right partners on my team or do I need to make some changes? It is a great time to be working on mobile banking strategies. There is so much innovation that the excitement and engagement has never been better - so take advantage of collaboration and partner up for success.
Many times prescreen filtering stops after risk selection but that’s just one small piece of the puzzle. Experian has new tools that can help you pick out the most profitable consumers based on your business objectives. Think about it - if you’re looking for consumers who will be profitable bankcard customers, wouldn’t you like to know what their total annual plastic spend is? Bankcard users come in all shape and sizes each with their own behavior patterns and preferences…so knowing if your prospects are revolvers or transactors, likely to balance transfer, or if they are rate sensitive, is all vital information to choosing who you want as your next customer. At Experian, we have a suite of the most advanced analytical tools such as TAPS (Total Annual Plastic Spend), Trend View Solutions, Balance Transfer Index, Estimated Interest Rate calculators, and others. We can help you sift through your list to find the most profitable consumers.t. In my next installment I’ll look at next generation prospecting models - beyond response.
Every prospecting list needs to be filtered by your organizations specific credit risk threshold. Whether you’re developing a campaign targeting super-prime, sub-prime, or consumers who fall somewhere in between, an effective credit risk model needs to do two things: 1) accurately represent a consumer’s risk level and 2) expand the scoreable population. The newly redeveloped VantageScore 3.0 does both. With VantageScore 3.0 you get a scoring model that’s calibrated to post-recession consumer behavior, as well the ability to score nearly 35 million additional consumers - consumers who are typically excluded from most marketing lists because they are invisible to older legacy models. Nearly a third of those newly-scoreable consumers are near-prime and prime. However, if your market is emerging to sub-prime consumers - you’ve found the mother-load! Delinquency isn’t the only risk to contend with. Bankruptcies can mean high losses for your organization at any risk level. Traditional credit risk models are not calibrated to specifically look for behavior that predicts future bankruptcies. Experian's Bankruptcy PLUS filters out high bankruptcy risk from your list. Using Bankruptcy PLUS you’re able to bring down your overall risk while removing as few people as possible. My next post looks into ways to identify profitable consumers in your list. For more see: Four steps to creating the ideal prospecting list.
Companies are facing incredible difficulties identifying fraud risks at the point of origination. Setting up accurate fraud detection processes has become more and more challenging as mobile and online channels have become widely used by consumers. At the same time, fraudsters’ techniques are becoming increasingly sophisticated. To compensate, organizations have had the choice of either: a) Implementing very tough identity-proofing standards — risking turning away legitimate customers. b) Lessening their criteria and opening themselves to increased risk. Any business that functions in a web connected environment that has a need to recognize new or returning consumers must look beyond the simple credentials that have been provided by the user such as usernames, passwords, email addresses, phone numbers, handles, secret questions or secret answers. To increase assurance businesses need to start need to start looking at authenticating users through their devices that are being used to present those credentials. The underground is awash in legitimate but stolen credentials and should be treated with a great deal of skepticism by the businesses attempting to authenticate their customers. There will always be a pendulum swaying in the echoes of this kind of news – with businesses locking down access with more stringent policies and in doing so they begin to undo all the work that has been done to create a frictionless consumer experience. The industry may now begin to realize the ultimate dream of the consumer: completely effortless access. Rather than requiring consumers to type in credentials that may have been compromised why not leverage the various technologies that exist to simply recognize the consumer when they access the site in question? Digital consumers interact with businesses via their digital proxies – their devices – which must come in digital contact with the web servers in order to gain access. The industry should require the machines to do heavy lifting (rather than consumers) when it comes to “recognizing” them when they return. The right technology offers a more robust, privacy-compliant and transparent way for businesses to recognize their digital consumers. As we’ve discussed previously the authentication process will shift from a single view to a layered, risk-based authentication approach that will include comprehensive and real-time updates of consumer information. This is done through technology that has been tested over the years and protects millions of customer accounts today with incredible results in terms of both fraud detection and frictionless consumer experience. The time has come to embrace the realities and the possibilities of the new digital environment in which we operate. Learn more about how your business can authenticate consumers confidently.
By: Mike Horrocks As summer comes to end, so does the summer reading list but if you are still trying to get one in, I just finished reading “Isaac\'s Storm: A Man, a Time, and the Deadliest Hurricane in History”, which is about Isaac Cline the resident meteorologist for U.S. Weather Bureau and the 1900 Hurricane that devastated Galveston, Texas. It is a great read, using actual telegraphs, letters, and reports to show the flaws of an outdated system and how not looking to new sources of information and not seeing the values of nontraditional views, etc., lead to unfathomable destruction for the people of Galveston. As I read the book, I was challenged to think of what is right in front of me that I am not seeing for what it is, just like Mr. Cline ignored reports that would have clearly saved lives and helped predict the storm. So, how can this historical storm teach us a thing or two in the financial industry? Clearly one of the most rapidly changing aspects in banking today is the mobile channel. Many institutions have already adjusted to using it as a service channel, with remote deposit capture, balance, inquiry etc., but what are they doing to take it to the next step? On August 7, 2014, Experian is hosting a webinar by American Banker titled, “What is next for mobile banking?” The webinar will have a powerful panel with thought leaders such as Dominic Venturo, the Chief Innovation Officer at U.S. Bank, Gordon Baird, the Chief Executive Officer at Independence Bancshares, and Cherian Abraham, Senior Business Consultant with Experian’s Global Consulting Practice. If you are already using mobile or maybe trying to look at what you could change, this is a great session to attend. Over the next couple of weeks, we are going to go into some of the key topics from this webinar and explore them some more. Hope to see you at this American Banker webinar.
At Experian, we frequently get asked by clients how they can get bigger mailing list that open new markets and reach more people. But bigger isn’t necessarily better, and it doesn’t always translate to a higher return on your marketing investment. Instead of just increasing volume, let’s consider a different, more focused approach - using the latest in analytic tools and scores. This approach relies on effective pre-screening to create the ideal prospecting lists based on your business objective. We’ve identified four key steps to building a prescreen list of your ideal prospects: Optimize risk selection Find the most profitable consumers Target customers who need or want your products Design the right offer In the next post, Optimal Risk Selection, I’ll dig deeper into each step and present some tools and scores that can help meet the objective of each.
By: Teri Tassara “Do more with less” is a pervasive and familiar mantra nowadays as lenders seek to make smarter and more precise lending decisions while expertly balancing growth objectives and tightened budgets. And lest we forget, banks must also consider the latest regulations and increased regulatory scrutiny from the industry’s governing bodies - such as OCC and CFPB. Nowadays, with the extensive application of predictive analytics in everyday lending practices, it makes sense to look to analytics to fine tune decision-making and achieve a greater return on investment in three common growth objectives for bankcard acquisitions: Profitable growth - How do I find the most profitable acquisition targets? How do I know the borrowing characteristic of each consumer? Are they high spend or high income? Do they carry a balance but always make timely payments? Universe expansion - How many more consumers are there that meet my lending criteria? How can I effectively reach them? Customer experience - How do I offer the right product to the right customer? How do I communicate to my customers that I understand their lending needs? To that end, growth objectives vary by lender; as such, so should their bankcard acquisitions analytical toolkit. The analytical toolkit arsenal should enable lenders to develop refined bankcard campaign strategies based on their specific objectives. Look for upcoming posts on the essential components of the bankcard acquisitions analytical toolkit.
Residential real estate lending was the leading component of the Great Recession of 2007-2009. Could it happen again? Let’s analyze our Intelliview data to see where U.S. lending trends are headed with HELOCs. A large portion of Home Equity Lines of Credit (HELOCs) were originated from 2004 to 2007. The term structure of these HELOCs will soon result in larger monthly payments, which could potentially promote consumer debt burden troubles. Additionally, with as much as 13% of all first mortgage customers having balances greater than the value of homes, many HELOCs wallow underwater. HELOCs typically have a ten year draw followed by a twenty-year repayment period. However, there are variations in the term structures. HELOCs can have as little as a five year draw, while others have a fifteen year repayment period. During the draw period, customers only pay interest on the balance. In the repayment period, the account functions like a loan, customers pay principal and interest. In 2012, the Office of Comptroller of the Currency (OCC, the primary banking regulator) reported that 58% of all bank HELOC balances would enter the repayment period and begin to amortize between 2014 and 2017 (OCC, Semiannual Risk Perspective, Spring 2012). This report renewed fears that the increase in payments would lead to higher delinquencies and foreclosures, limit consumer spend and provide a drag on the U.S. economy. Paradoxically, the OCC estimates of the HELOC balances entering the repayment period may be low. The OCC has accounted only for $392 billion of HELOC balances among banks. Experian’s review of all HELOC trades shows a significantly higher level of balances. Additionally, American Banker estimates the top 200 banks and thrifts had more than $477 billion in HELOC outstanding as of the end of 2013, with the top three lenders (Bank of America, Wells Fargo and JP Morgan Chase) comprising nearly $300 billion. Experian examined HELOCs in the four states with the greatest surges in home values and lending prior to the Great Recession. California comprises nearly 19% of all HELOC balances and lines. With averaging HELOC balances of 53% above the national mean, Arizona, Florida and Nevada are the three highest utilization rates by state. Nevada has the highest 30+ day delinquency rate in the country at 2.92%, while the national average is 1.64%. According to CoreLogic’s most recent home price index report, Nevada, Florida and Arizona home prices remain 30-39% below their peak real estate values. California’s prices are down 17%, and the national average home value is still 14% below its highest value. Refinancing HELOCs may be difficult due to the significant number of second liens still underwater. Compounding this difficulty, lending standards also have tightened, with regard to loan-to-value, debt ratios and credit quality. The average HELOC was examined at a 4.5% interest rate and a 20 year repayment period. The average monthly payment increases almost 69% when the account leaves the draw period and requires paying principal balance as well as interest. This payment increase accounts for approximately 2.6% of the median U.S. household gross annual income. It is estimated that the increase in HELOC payments will comprise $1 billion in additional annual payments during 2014, and an additional $9 billion between 2015 through 2017. However, it is important to remember that not all HELOCs will reach repayment. HELOCs are priced based on the prime rate. That rate has been 3.25% for more than five years, a historical low. When prime rate reached this level in December 2008, the rate was at its lowest in 53 years. Only 18 months prior to reaching 3.25%, the prime rate had been 8%. If the prime rate increases by 1% to 4.25%, the average payment of accounts in the draw period would increase 22%, affecting just about every HELOC, with a national increase in annual payments of about $5 billion. The volume of HELOCs that are beginning to enter the repayment period may eventually increase delinquency rates. However, no such increase is yet evident. As shown below, delinquency rates are steady after a long decline. In the past three years, 90+ days delinquency has declined 41%. The Majority of HELOCs are second mortgages. Successful completion of a foreclosure would involve making the customer’s monthly first mortgage payment in addition to all other expenses incurred in foreclosure and the sale of the property. Very often foreclosing from a second lien does not make financial sense unless the financial institution also holds the first mortgage on the property. As a large portion of HELOCs enter the repayment period in the next four years, the payments that customers must make will increase considerably. With interest rates as low as they are, the prime rate will eventually rise, and increase debt service ratios. These payment increases will have implications on consumers, lenders and the economy. Having grown 10.5% in the last year, home values continue to recover from the recession. It is yet to be determined whether this payment increase will have a broader or more isolated impact. In the meantime, HELOCs will continue to see their resurgence. For more insight like this from Experian Decision Analytics, watch our 2014 Q1 Experian–Oliver Wyman Market Intelligence Report presentation.
Are you sure you are making the best consumer credit decisions? Given the constantly evolving market conditions, it is a challenge to keep informed. In order to confidently grow and manage the bottom line, organizations need to avoid these four basic risks of making credit decisions with limited trend visibility. Competitive Risk - With limited visibility to industry trends, organizations cannot understand their position relative to peers. Product Risk - Organizations without access to the latest consumer behaviors cannot identify and capitalize on emerging trends. Market Risk - Decisions suffer when made without considering market trends in the context of the economy. Resource Risk - Extracting useful insights from vast market data requires abundant resources and comprehensive expertise. Get more information on the business risks of navigating credit decisions with limited trend visibility.
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