Credit Lending
By: Kennis Wong On the surface, it’s not difficult to define existing account fraud. Obviously, it is fraud perpetrated against an existing account. But the way I see it, existing account fraud can be broken down into four types. The first type is account takeover fraud, which is what most organizations think as the de facto existing account fraud. This is when a real consumer using his or her own identity to open a legitimate account, but the account later on get taken over by an identity fraudster. The idea is that when the account was first established, it was created by the rightful person. But somewhere along the way, the account and identity information were compromised. The fraudster uses the compromised information to engineer their way into the account. The second type is impersonation. Impersonation is somewhat similar to account takeover in the sense that it is also misusing the victim’s account. But the difference is that impersonation is more of a one or few times misuses of the account. Examples are a fraudulent use of a credit card or wire transfer. These are the obvious categories. But I think we should also think about these other categories. My definition of existing account fraud also includes this third type – identity fraud that was undetected during application. In other words, an account is established based on stolen identity. Many organizations call this “new account fraud”, which I don’t have a problem with. But I think it’s really also existing account fraud, because – is this existing account? The answer is yes. Is this fraud? Absolutely. It’s not that difficult, is it? Similarly, I am including first-party fraud in existing account fraud as well. A consumer can use his or her own identity to open an account, with an intention to default after the account is established. Example is bust out fraud. You see that this is an expanded definition of existing account fraud, because my focus is on detection. No matter at what point and how identity fraud comes in, it becomes an account in your organization, and that is where we need to discover the fraud. But at the end of the day, it’s not too important how to categorize or name the fraud - whether it\'s application fraud, existing account fraud, first party fraud or third party fraud, as long as organizations understand them enough and have a good way to detect them. Read more blog posts on existing account fraud.
For communications companies, acquiring new accounts is an ongoing challenge. However, it is critical to remember that managing new and existing accounts – and their respective risks – is of tremendous importance. A holistic view of the entire customer lifecycle is something every communications organization can benefit from. The following article was originally posted by Mike Myers on the Experian Business Credit blog. Most of us are pretty familiar with credit reports and scores, but how many of you are aware of the additional tools available to help you manage the entire credit risk lifecycle? I talk to credit managers everyday and as we’re all trying to do more with less, it’s easy to forget that opening accounts is just the first step. Managing risk on these accounts is as critical, if not more so, than opening them. While others may choose to “ship and chase”, you don’t need to. Proactive alert/monitoring services, regular portfolio scoring and segmentation are key components that a successful credit department needs to employ in the constant battle against “bad” accounts. Use these tools to proactively adjust credit terms and limits, both positively and negatively. Inevitably some accounts will go bad, but using collection research tools for skip tracing and targeting services for debt collection will put you first in line for collections. A journey of 1,000 miles begins with a single step; we have tools that can help you with that journey and all can be accessed online.
By: Tracy Bremmer Score migration has always been a topic of interest among financial institutions. I can remember doing score migration analyses as a consultant at Experian for some of the top financial institutions as far back as 2004, prior to the economic meltdown. Lenders were interested in knowing if I could approve a certain number of people above a particular cut-off, and how many of them will be below that cutoff within five or more years. Or conversely, of all the people I’ve rejected because they were below my cut-off, how many of them would have qualified a year later or maybe even qualified the following month. We’ve done some research recently to gain a better understanding of the impact of score migration, given the economic downturn. What we found was that in aggregate, there is not a ton of change going on. Because as consumers move up or down in their score, the overall average shift tends to be minimal. However, when we’ve tracked this on a quarterly basis into score bands or even at a consumer level, the shift is more meaningful. The general trend is that the VantageScore “A” band, or best scorers, has been shrinking over time, while the VantageScore “D” & “F” bands, lower scorers, has grown over time. For instance, in 2010 Q4, the amount of consumers in VantageScore A was the lowest it has been in the past three years. Conversely, the number of consumers falling into the VantageScore “D” & “F” bands are the highest they have been during that same time period. This constant shift in credit scores, driven by changes in a consumer’s credit file, can impact risk levels beyond the initial point of applicant approval. For this reason, we recommend updating and refreshing scores on a very regular basis, along with regular scorecard monitoring, to ensure that risk propensity and the offering continue to be appropriately aligned with one another.
By: Kari Michel On March 18th 2011 the Federal Reserve Board approved a rule amending Regulation Z (Truth in Lending) to clarify portions of the final rules implementing the Credit CARD Act of 2009. Specific to ability to pay requirements, the new rule states that credit card applications generally cannot request a consumer\'s \"household income\" because that term is too vague to allow issuers to properly evaluate the consumer\'s ability to pay. Instead, issuers must consider the consumer\'s individual income or salary. The new ruling will be effective October 2011. Given the new direction outlined in the latest rules, we\'ve been hard at work on developing 2 income models to support these regulatory obligations and enhance the underwriting and risk assessment process - Income InsightSM and Income Insight W2SM. Both income models estimate an individual’s income based on an individual credit report and can be used in acquisition strategies, account management review and collection processes. Why two models? Income InsightSM estimates the consumer’s total income, including wages, investments, rentals and other income. Income Insight W2SM estimates wages only. Check them out - and let us know what you think! We want to hear from you.
By: Staci Baker It seems like every time I turn on the TV there is another natural disaster. Tsunami in Japan, tornadoes and flooding in the Mid-West United States, earthquakes and forest fires – everywhere; and these disasters are happening worldwide. They are not confined to one location. If a disaster were to happen near any of your offices, would you be prepared? Living in Southern California, this is something I think of often. Especially, since we are supposed to have had “the big one” for the past several years now. When developing a preparedness plan for a company, there are several things to take into consideration. Some are obvious, such as how to keep employees safe, developing steps for IT to take to ensure data is protected , including an identity theft prevention program, and establishing contingency business plans in case a disaster directly hits your business and doors need to remain closed for several days, weeks, or …. But, what about the non-obvious items that should be included in a disaster preparedness plan? When a natural disaster hits, there is an increase in fraud. So much so, that after Hurricane Katrina battered the Gulf, the Hurricane Katrina Fraud Task Force, now known as the National Center for Disaster Fraud, was created. In addition to the items listed above, I recommend including the following. Create a plan that will put fraud alerts in place to minimize fraud. Fraud alerts are not just to notify your clients when there is fraudulent activity on their accounts. Alerts should also be put in place to let you know when there is fraudulent activity within your own business as well. Depending on the type of disaster, delinquency rates may increase, since borrower funds may be diverted to other needs. Implement a disaster collections strategy, which may include modifying credit terms, managing credit risk, and loan loss provisioning. Although these are only a few things to be considered when developing a disaster preparedness plan, I hope it gets you thinking about what your company needs to do to be prepared. What are some things you have already done, or that are on your to do list to prepare your company for the next big event that may affect you?
Unless you’ve been hiding under a rock, you are undoubtedly aware that the 4G ship has sailed into port. The 4G network is a completely different technology as compared to 3G, the network it is replacing. 3G was fast, but 4G will set the world on fire. It’s kind of like the difference between a farm tractor and a Lamborghini. Rather than just being able to check email and (slowly) surf the net (as with 3G), 4G users will be able to watch live television and rip through online content like nobody’s business. So what does this mean for communications companies? Change device, change carrier? The big question for wireless providers is whether or not customers will change carriers as they upgrade to new, 4G-supported devices. The simple answer is, it depends. Customers who are currently under contract will not likely jump ship for the simple fact that it will cost too much. For example, let’s say I want to upgrade five devices. I can probably buy these less expensively by changing carriers (due to attractive introductory offers). However, if I have to cancel three contracts prior to term end to do it, it may cost me upwards of $1,000—probably more than I can save by changing carriers. For customers who are at the end of a contract term, upgrading to 4G presents a golden opportunity to change providers, if that’s something they’ve been considering. Wireless providers will obviously need to contact these customers well before their contracts are up and make them an offer they simply can’t refuse. Other concerns for wireless providers Obviously, key players in the market have invested a significant amount of money to develop the 4G infrastructure, and sooner or later they’re going to want to recoup those costs. Introductory offers will motivate many to upgrade to 4G, but will all these new/upgrade customers be able to pay the higher monthly bills that will likely come with their new 4G devices? While locking in all these new contracts will positively affect sales quotas, it will be more important than ever to assess these customers’ cash flow situations and credit-worthiness, so they don’t end up negatively affecting the bottom line. Concerns for other telecommunications companies One other interesting aspect to consider is this: With a 4G device, consumers can effectively create their own “hot spot.” So the question is, just as many people are dropping their landlines in favor of wireless, will 4G device users decide to drop their Internet providers? How about their cable television service? I intend to revisit this topic in 3-6 months to see whether early 4G adopters are in fact jumping to different carriers and/or dropping other services. What do you think might happen as 4G becomes the new normal? Leave a comment and share your thoughts.
Last week I attended the Merchant Risk Council’s 2011 MRC Annual e-Commerce Payments & Risk Conference. I presented a session titled “Efficiency and Empowerment in Risk-based Authentication” with a client who has been able to use knowledge based authentication as a sales enabler - Home Shopping Network. You might be wondering what I mean by this. It is actually pretty simple: Home Shopping Network already has a fraud prevention program in place and utilizes risk based authentication to send a percentage of orders to an outsort queue. By using knowledge based authentication to further verify the true consumer, Home Shopping Network has been able to release an increased portion of those orders for shipping, increasing both revenue and the customer experience. The paradigm shift was thinking of knowledge based authentication as a sale enabler, rather than just a fraud tool. It was a great experience, to help share the story of this client’s success. If you are interested in the Merchant Risk Council: The Merchant Risk Council (MRC) is a merchant-led trade association focused on electronic commerce risk and payments. They lead industry networking, education, benchmarking and advocacy programs to make electronic commerce more efficient, safe and profitable. For more information on the Home Shopping Network, visit: http://www.hsn.com
Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:\"Table Normal\"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:\"\"; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:\"Calibri\",\"sans-serif\"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:\"Times New Roman\"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} Normal 0 false false false EN-US X-NONE X-NONE MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:\"Table Normal\"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:\"\"; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:\"Calibri\",\"sans-serif\"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:\"Times New Roman\"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;} By: Kristan Frend I was recently pleased to see that the state I reside in, Minnesota finished in the bottom third of a state ranking. Luckily the rankings weren’t about overall health (#6), high school graduation (#3), or SAT scores (#2); instead it was the Federal Trade Commission’s state identity theft complaint ranks. Minnesota has just 49.2 complaints per 100,000 population, whereas the highest ranked state, Florida, as 114.8 complaints per 100,000 population. The top three states leading identity theft consumer complaints (per 100,000 population) included Florida, Arizona, and California. Besides warm sunshine and top-tier golf courses, what do these three states have in common? According to the February 2011 RealtyTrac U.S. Foreclosure Market Report™, all three rank in the top 5 states for foreclosure, and two of the three (Florida and California) rank #49 and #50 in unemployment rates, according to a March 2011 report released by the Bureau of Labor Statistics. On a national level unemployment rates and identity fraud incidence rates both improved from 2009 to 2010. From 2009 to 2010, unemployment rates went from 10.0% to 9.4% while according to Javelin’s 2010 Annual Identity Fraud Survey Report, identity fraud incidence rates fell from 4.8% to 3.5%. While it may be inaccurate to state that economic distress causes higher rates of identity fraud, there does seem to be a natural correlation between economic downswings and fraudulent activity. As we move further into 2011, it will be interesting to see if identity fraud incidence rates will continue to decrease as unemployment and economic outlook is on the upward swing. Normal 0 false false false EN-US X-NONE X-NONE /* Style Definitions */ table.MsoNormalTable {mso-style-name:\"Table Normal\"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:\"\"; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin-top:0in; mso-para-margin-right:0in; mso-para-margin-bottom:10.0pt; mso-para-margin-left:0in; line-height:115%; mso-pagination:widow-orphan; font-size:11.0pt; font-family:\"Calibri\",\"sans-serif\"; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:\"Times New Roman\"; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin;}
I love a good analogy, and living in Southern California, lately I’ve been thinking a lot about earthquakes, and how lenders might want to start thinking like seismologists when considering the risk levels in their portfolios. Currently, scientists that study earthquakes review mountains of data around fault movement, tidal forces, even animal behavior, all in an attempt to find a concrete predictor of ‘the big one’. Small tremors are inputs, but the focus is on predicting and preparing for the large shock and impact of large earthquakes. Credit risk modeling, conversely, seems to focus on predicting the tremors, (risk scores that predict the risk of individual default) and less so the large-shock risk to the portfolio. So what are lenders doing to forecast ‘the big one’? Lenders are building sophisticated models that contemplate the likelihood of the big event – developing risk models and econometric models that look at loan repayment, house prices, unemployment rates – all in an attempt to be ahead of the credit version of ‘the big one’. This type of model and perspective is at a nascent stage for many lenders, but like the issues facing the people of Southern California, preparing for the big-one is an essential part of every lender’s planning in today’s economy.
As our newly elected officials begin to evaluate opportunities to drive economic growth in 2011, it seems to me that the role of lenders in motivating consumer activity will continue to be high on the list of both priorities and actions that will effectively move the needle of economic expansion. From where I sit, there are a number of consumer segments that each hold the potential to make a significant impact in this economy. For instance, renters with spotless credit, but have not been able or confident enough to purchase a home, could move into the real estate market, spurring growth and housing activity. Another group, and one I am specifically interested in discussing, are the so called ‘fallen angels’ - borrowers who previously had pristine track records, but have recently performed poorly enough to fall from the top tiers of consumer risk segments. I think the interesting quality of ‘fallen angels’ is not that they don’t possess the motivation needed to push economic growth, but rather the supply and opportunity for them to act does not exist. Lenders, through the use of risk scores and scoring models, have not yet determined how to easily identify the ‘fallen angel’ amongst the pool of higher-risk borrowers whose score tiers they now inhabit. This is a problem that can be solved though – through the use of credit attributes and analytic solutions, lenders can uncover these up-side segments within pools of potential borrowers – and many lenders are employing these assets today in their efforts to drive growth. I believe that as tools to identify and lend to untapped segments such as the ‘fallen angels’ develop, these consumers will inevitably turn out to be key contributors to any form of economic recovery.
More prospects equal more profits, right? Not necessarily. But surprisingly, companies in every industry (including cable and telecom) routinely burn acquisition dollars as if it is. The reality is that only more qualified prospects can lead to more profitable campaigns, making acquisitions a clear case of quality besting quantity. But why? No substitute for quality Engaging unqualified prospects is an unprofitable exercise requiring time and resources that are better spent on those who are ready, willing and able to buy from you. Benefits of an effective acquisition strategy include greater: Resource efficiency—less time, money and energy wasted on no-payback prospects Brand loyalty and higher lifetime value—by accurately matching consumers to products they relate to and desire Profitability and less bad debt—this one is probably obvious Fishing where the (best) fish are So how should a profit-minded telecom or cable company identify highly qualified prospects and invite them into the fold? Using a credit-score threshold, where anyone possessing the target score receives an offer, is one method. The benefit is simplicity. One disadvantage is unnecessary risk, as credit score is just one factor reflecting an individual’s creditworthiness. Another possibility is analyzing your best customers’ profiles or most profitable underwriting policies and integrating profit-building criteria into your campaign. This takes a little more effort but the payback potential is higher. Tapping into available sources Many companies find public records a rich source of decisioning data. Others have discovered that adding consumer-credit information to their acquisition formula not only improves prospect quality, it also reduces on-boarding costs. Derogatory payment information, revolving debt levels or unacceptable debt-to-income ratios will all surface in the process, informing and improving your credit management decisions. (Note: using credit data to assess risk requires you to make a firm offer of credit, according to FCRA guidelines.) You’ll do a lot of prospecting in 2011, so remember: when it comes to acquiring new customers, more isn’t better. Better is better. And using reliable, high-quality data is one way to ensure the impact and return of every marketing dollar.
By: Staci Baker There has been a lot of talk in the news about the Dodd-Frank Act lately. According to the Dodd-Frank Resource Center of the American Financial Services Association (AFSA), “The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which passed on July 21, 2010, is unprecedented in magnitude, and will impact every sector of the financial services industry.” The aim of the Act is to put measures in place that address the issues that led to the financial crisis. This is done by setting up new regulatory bodies, and limiting the dealings of banks and other financial institutions. For the purpose of this blog, I will focus on describing the new regulatory agencies. The Bureau of Consumer Financial Protection (CFPB), is an independent watchdog housed within the Federal Reserve. The CFPB has the authority to “regulate consumer financial products and services in compliance with federal law.”[ii] They are responsible for the accuracy of information, hidden fees and deceptive practices for consumers from within the following industries – mortgage, credit cards and other financial products. The Financial Stability Oversight Council is “charged with identifying threats to the financial stability of the United States, promoting market discipline, and responding to emerging risks to the stability of the United States financial system.”ii Through the Treasury, this council will create a new Office of Financial Research, which will be responsible for collecting and analyzing data to identify and monitor emerging risks to the economy, and publish the findings in periodic reports. These new regulatory agencies are critical to US business processes, as they will more closely monitor business practices, create new tighter legislation, and report findings to the public. The legislation that is created will decrease risk levels posed by large, complex companies, as well as address discrepancy that has been raised throughout the financial crisis. What are your views of the Dodd-Frank Act? Do you believe this is the legislation needed to stem future financial crisis? If not, what would help you and your business?
Increased incidence of “involuntary renters” According to the Mortgage Bankers Association, one out of every 200 homes will be foreclosed. The incidence of “involuntary renters” will increase as a high foreclosure rate continues, in turn, fueling the current trend of consumers who rely solely on mobile service instead of landlines. Implications for communications companies Does it necessarily follow that foreclosure equals bad risk? I don’t think so. For example, many consumers who have undergone foreclosure were subjected to a readjusted ARM that doubled or even tripled their mortgage payments. While taking a mortgage out of a consumer’s credit file can negatively impact the overall credit score, it can also potentially generate a more positive cash flow. The consumer’s new rent payments would be lower than the readjusted mortgage would have been, making the consumer a potentially good customer for communications services. Wireless companies, in particular, prefer to approve customers for regular installment plans (as opposed to prepaid plans). The goal, for nearly all communications companies, is to qualify customers for service without the need for a deposit. The key, when assessing credit risk, is to look at the total credit/payment history, not just the credit score alone. Best Practices for qualifying involuntary renters: Validate ID/authenticate. Checking the credit application information against several data sources will help avoid potential fraud. Look at the overall credit picture, especially the current debt-to-income ratio. Review third-party data for payment history. Along with the typical payment data, Experian now offers rental histories through RentBureau. This data has the ability to increase credit report accuracy for renters. Consider the basic lender mentality. Consumers who have exhibited good payment history on utilities, credit cards, and other debt in the past are likely to continue that behavior despite having lost their house to foreclosure. Considering the total credit picture allows you to rank-order customers and group them into populations that are lower risk, identifying, for example, those who can be serviced without an upfront deposit. In future posts, I’ll provide some guidance for rank-ordering customers as to their credit-worthiness.
In the communications industry, effective acquisition is a multi-step process, best begun by asking (and accurately answering) simple, but critical questions: Who are our best prospects? Where can we find them? What should we offer them and how? Of course, the “why” is obvious—beating competitors to the punch. The similarities of today’s increasingly undifferentiated products and services make attracting high-quality customers more critical than ever. On the surface, the “who” seems equally straightforward. But it’s surprising how many communications companies still blanket the nation with ads and offers without knowing whom they want to reach or which messages to lead with. This brings us to the “how” of effective acquisition. Banks get it right Banks provide a good acquisition model. In these days of tight budgets and high expectations, most would never dream of investing in a campaign without first creating a well-defined, data-driven segmentation strategy. To get the results they want, institutions usually establish some credit-score threshold, check past payment history and assess other factors and behaviors, before starting up their marketing machine. Not surprisingly, the rewards for this foresight often include higher response rates, lower costs and greater value per promotional dollar. What’s next? Once you zero in on a fresh crop of qualified prospects the “whats” come next: what’s the best marketing channel? What products or services should we offer? What terms? Again, clean historic data, combined with up-to-date information from surveys and questionnaires can reveal surprising insights into why customers choose your company or offer over your competitors’. In communications, as in banking, reliable data is a proven source for answers to a whole slew of customer-acquisition questions. But does it offer similar value in other phases of customer lifecycle management? And if so, how? Funny you should ask. Because that’s exactly what future posts here will cover, so please check back often.
By: Kari Michel What are you doing to prepare for the new credit score disclosure requirements for taking adverse action on the basis of information contained in a consumer credit profile report, including scoring models? The Dodd-Frank Wall Street Reform and Consumer Protection Act (CFPB) which was signed by President Obama on July 21, 2010, have prescribed new rules for Adverse Action and Risk Based Pricing notifications. The new credit score disclosure rules will become effective July 21, 2011. The rules have NOT been finalized at this time. With the information currently available, the new rules will impact all lenders who take adverse action against a consumer due to information in a consumer credit report. Lenders will be required to disclose to the consumer: · The actual numerical score used in the adverse decision (new requirement) · The range of possible scores under the model used (new requirement) · All key factors that adversely affected the credit score - This legislation mandates the delivery of 5 factor codes (when applicable). The notice must include the top 4 and then a 5th when inquiries play a negative part in the score calculation (new requirement) · The date on which the credit score was created · The name of the entity that provided the score If you have questions regarding the FCRA sections that are changing, you can refer to the Dodd-Frank legislation section 1100F.
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