By: Joel Pruis Some of you may be thinking finally we get to the meat of the matter.  Yes the decision strategies are extremely important when we talk about small business/business banking.  Just remember how we got to here though, we had to first define: Who are we going to pursue in this market segment? How are we going to pursue this market segment - part 1 &  part 2? What are we going to require of the applicants to request the funds? Without the above, we can create all the decision strategies we want but their ultimate effectiveness will be severely limited as they will not have a foundation based upon a successful execution. First we are going to lay the foundation for how we are going to create the decision strategy.  The next blog post (yes, there is one more!) will get into some more specifics.  With that said, it is still important that we go through the basics of establishing the decision strategy. These are not the same as investments. Decision strategies based upon scorecards We will not post the same disclosure as do the financial reporting of public corporations or investment solicitations.  This is the standard disclosure of “past performance is not an indication of future results”.  On the contrary, for scorecards, past performance is an indication of future results.  Scorecards are saying that if all conditions remain the same, future results should follow past performance.  This is the key. We need to fully understand what the expected results are to be for the portfolio originated using the scorecard.  Therefore we need to understand the population of applications used to develop the scorecards, basically the information that we had available to generate the scorecard.  This will tie directly with the information that we required of the applications to be submitted. As we understand the type of applications that we are taking from our client base we can start to understand some expected results. By analyzing what we have processed in the past we can start to build about model for the expected results going forward. Learn from the past and try not to repeat the mistakes we made. First we take a look at what we did approve and analyze the resulting performance of the portfolio. It is important to remember that we are not to be looking for the ultimate crystal ball rather a model that can work well to predict performance over the next 12 to 18 months. Those delinquencies and losses that take place 24, 36, 48 months later should not and cannot be tied back to the information that was available at the time we originated the credit. We will talk about how to refresh the score and risk assessment in a later blog on portfolio management. As we see what was approved and demonstrated acceptable performance we can now look back at those applications we processed and see if any applications that fit the acceptable profile were actually declined. If so, what were the reasons for the declinations?  Do these reasons conflict with our findings based upon portfolio performance? If so, we may have found some additional volume of acceptable loans. I say "may" because statistics by themselves do not tell the whole story, so be cautious of blindly following the statistical data. My statistics professor in college drilled into us the principle of "correlation does not mean causation".  Remember that the next time a study featured on the news.  The correlation may be interesting but it does not necessarily mean that those factors "caused" the result.  Just as important, challenge the results but don't use outliers to disprove here results or the effectiveness of the models. Once we have created the model and applied it to our typical application population we can now come up with some key metrics that we need to manage our decision strategies:     Expected score distributions of the applications     Expected approval percentage     Expected override percentage     Expected performance over the next 12-18 months Expected score distributions We build the models based upon what we expect to be the population of applications we process going forward. While we may target market certain segments we cannot control the walk-in traffic, the referral volume or the businesses that will ultimately respond to our marketing efforts. Therefore we consider the normal application distribution and its characteristics such as 1) score; 2) industry; 3) length of time in business; 4) sales size; etc.  The importance of understanding and measuring the application/score distributions is demonstrated in the next few items. Expected approval percentages First we need to consider the approval percentages as an indication of what percent of the business market to which we are extending credit. Assuming we have a good representative sample of the business population in the applications we are processing we need to determine what percentile of businesses will be our targeted market. Did our analysis show that we can accept the top 40%? 50%?  Whatever the percentage, it is important that we continue to monitor our approval percentage to determine if we are starting to get too conservative or too liberal in our decisioning. I typically counsel my client that “just because your approval percentage is going up is not necessarily an improvement!”  By itself an increase in approval percentage is not good.  I'm not saying that it is bad just that when it goes up (or down!) you need to explain why. Was there a targeted marketing effort?  Did you run into a short term lucky streak? OR is it time to reassess the decision model and tighten up a bit? Think about what happens in an economic expansion. More businesses are surviving (note I said surviving not succeeding). Are more businesses meeting your minimum criteria?  Has the overall population shifted up?  If more businesses are qualifying but there has been no change in the industries targeted, we may need to increase our thresholds to maintain our targeted 50% of the market. Just because they met the standard criteria in the expansion does not mean they will survive in a recession. "But Joel, the recession might be more than 18 months away so we have a good client for at least 18 months, don't we?". I agree but we have to remember that we built the model assuming all things remain constant. Therefore if we are confident that the expansion will continue at the same pace infinitum, then go ahead and live with the increased approval percentage.  I will challenge you that it is those applicants that "squeaked by" during the expansion that will be the largest portion of the losses when the recession comes. I will also look to investigate the approval percentages when they go down.  Yes you can make the same claim that the scorecard is saying that the risk is too great over the next 12-18 months but again I will challenge that if we continue to provide credit to the top 40-50% of all businesses we are likely doing business with those clients that will survive and succeed when the expansion returns.  Again, do the analysis of “why” the approval percentage declined/dropped. Expected override percentage While the approval percentage may fluctuate or stay the same, another area to be reviewed is that of the override.  Overrides can be score overrides or a decision override.  Score override would be contradicting the decision that was recommended based upon the score and/or overall decision strategy.  Decision override would be when the market/field has approval authority and overturns the decision made by the central underwriting group.  Consequently you can have a score override, a decision override or both.  Overrides can be an explanation for the change in approval percentages.  While we anticipate a certain degree of overrides (say around 5%), should the overrides become too significant we start to lose control of the expected outcomes of the portfolio performance.  As such we need to determine why the overrides have increase (or potentially decrease) and the overrides impact on the approval percentage.  We will address some specifics around override management in a later blog.  Suffice to say, overrides will always be present but we need to keep the amount of overrides within tolerances to be sure we can accurate assess future performance. Expected performance over next 12-18 months The measure of expected performance is at minimum the expected probability/propensity of repayment.  This may be labeled as the bad rate or the probability of default (PD).  In a nutshell it is the probability that the credit facility will be a certain level of delinquency over the next 12-18 months.  What the base level expected performance based upon score is not the expected “loss” on the account.  That is a combination of the probability of default combined with the expected loss given event of default. For the purpose of this post we are talking about the probability of default and not the loss given event of default.  For reinforcement we are simply talking about the percentage of accounts that go 30 or 60 or 90 days past due during the 12 – 18 months after origination. So bottom line, if we maintain a score distribution of the applications processed by the financial institution, maintain the approval percentage as well as the override percentages we should be able to accurately assess the future performance of the newly originated portfolio. Coming up next… A more tactical discussion of the decision strategy  

Lenders continued to increase their appetite for risk in Q2 2011, with new vehicle loans for customers with credit outside of prime increasing by 22.4 percent compared with the previous year. In Q2 2011, 22.29 percent of all new vehicle loans went to customers in the nonprime, subprime and deep-subprime categories, increasing from 18.21 percent in Q2 2010. The largest percentage increase in new car loans was in the category with the highest risk: deep subprime, which jumped 44.1 percent, moving from 1.48 percent of all new vehicle loans in Q2 2010 to 2.13 percent in Q2 2011. For more information on Experian Automotive's AutoCount® Risk Report, visit www.autocount.com Source: Automotive quarterly credit trends

Experian® QAS®, a leading provider of address verification software and services, recently released a new benchmark report on the data quality practices of top online retailers. The report revealed that 72 percent of the top 100 retailers are using some form of address verification during online checkout. This third annual benchmark report enables retailers to compare their online verification practices to those of industry leaders and provides tips for accurately capturing email addresses, a continuously growing data point for retailers. To find out how online retailers are utilizing contact data verification, download the complimentary report 2012 Address Verification Benchmark Report: The Top 100 Online Retailers. Source: Press release: Experian QAS Study Reveals Prevalence of Real-Time Address Verification Increasing Among Top Online Retailers.

A recent Experian credit trends study showcases the types of debts Americans have, the amounts they owe and the differences between generations. Nationally, the average debt in the United States is $78,030 and the average VantageScore® credit score is 751. The debt and VantageScore® credit score distribution for each group is listed below, with the 30 to 46 age group carrying the most debt and the youngest age group (19 to 29) carrying the least: Age group Average debt Average VantageScore® credit score 66 and older $38,043 829 47 to 65 $101,951 782 30 to 46 $111,121 718 19 to 29 $34,765 672   Get your VantageScore® credit score here Source: To view the complete study, please click here VantageScore® is owned by VantageScore Solutions, LLC

In Q3 2011, $143 billion – or nearly 44 percent of the $327 billion in new mortgage originations – was generated by VantageScore® A tier consumers. This represents an increase of 35 percent for VantageScore A tier consumers when compared with originations for the quarter before ($106 billion, or 39 percent of total originations). Watch Experian's Webinar for a detailed look at the current state of strategic default in mortgage and an update on consumer credit trends from the Q4 2011 Experian-Oliver Wyman Market Intelligence Reports Source: Experian-Oliver Wyman Market Intelligence Reports. VantageScore® is owned by VantageScore Solutions, LLC.

In my last two posts on bankcard and auto originations, I provided evidence as to why lenders have reason to feel optimistic about their growth prospects in 2012.  With real estate lending however, the recovery, or lack thereof looks like it may continue to struggle throughout the year. At first glance, it would appear that the stars have aligned for a real estate turnaround.  Interest rates are at or near all-time lows, housing prices are at post-bubble lows and people are going back to work with the unemployment rate at a 3-year low just above 8%. However, mortgage originations and HELOC limits were at $327B and $20B for Q3 2011, respectively.  Admittedly not all-time quarterly lows, but well off levels of just a couple years ago.  And according to the Mortgage Bankers Association, 65% of the mortgage volume was from refinance activity. So why the lull in real estate originations?  Ironically, the same reasons I just mentioned that should drive a recovery. Low interest rates – That is, for those that qualify.  The most creditworthy, VantageScore® credit score A and B consumers made up nearly 77% of the $327B mortgage volume and 87% of the $20B HELOC volume in Q3 2011.  While continuing to clean up their portfolios, lenders are adjusting their risk exposure accordingly. Housing prices at multi-year lows - According to the S&P Case Shiller index, housing prices were 4% lower at the end of 2011 when compared to the end of 2010 and at the lowest level since the real estate bubble.  Previous to this report, many thought housing prices had stabilized, but the excess inventory of distressed properties continues to drive down prices, keeping potential buyers on the sidelines. Unemployment rate at 3-year low – Sure, 8.3% sounds good now when you consider we were near 10% throughout 2010.  But this is a far cry from the 4-5% rate we experienced just five years ago.   Many consumers continue to struggle, affecting their ability to make good on their debt obligations, including their mortgage (see “Housing prices at multi-year lows” above), in turn affecting their credit status (see “Low interest rates” above)… you get the picture. Ironic or not, the good news is that these forces will be the same ones to drive the turnaround in real estate originations.  Interest rates are projected to remain low for the foreseeable future, foreclosures and distressed inventory will eventually clear out and the unemployment rate is headed in the right direction.  The only missing ingredient to make these variables transform from the hurdle to the growth factor is time.

Lenders are increasing loans to credit-challenged customers. According to Experian's quarterly automotive credit analysis, 21.87 percent of all new vehicle loans went to customers in the nonprime, subprime and deep-subprime categories. The largest percentage increases were in the two highest-risk segments: deep subprime, which jumped 17.3 percent, and subprime, which jumped 17.8 percent. Nonprime loan share increased 12.5 percent. View our recent Webinar on the state of the automotive market. Source: Experian Automotive's quarterly credit trend analysis. Download the quarterly studies and white papers.  

In 2010, lenders began to change their focus from maintaining to growing portfolios. Most strategies focused on marketing to the least risky tiers of consumers as lenders tested marketing strategies in an unfamiliar economic environment. In 2011, the focus is on expanding that marketable universe and determining how to profitably grow, while managing risk across a spectrum of consumer creditworthiness. Segments of the near-prime consumer population are both ready and able to take on additional debt obligations. View a  webinar to learn how to redefine your credit marketing strategy Source: Universe Expansion

While retail card utilization rates decreased slightly in Q3 2011, retail card delinquency rates increased for all performance bands (30-59, 60-89 and 90-180 days past due) in Q3 2011 after reaching multiyear lows the previous quarter. Listen to our recent Webinar on consumer credit trends and retail spending. Source: Experian-Oliver Wyman Market Intelligence Reports

Experian's recently released study on the credit card and mortgage payment behaviors* of consumers both nationally and in the top 30 Metropolitan Statistical Areas yielded interesting findings. Nationally, since 2007, 20 percent fewer credit card payments are 60 days late, but 25 percent more consumers are paying their mortgage 60 days late. The cities that showed the most improvements to bankcard payments include Cleveland, Ohio; San Antonio, Texas; Cincinnati, Ohio; Dallas, Texas; and Houston, Texas. Cities that have made the least improvements to their credit card payments include Riverside, Calif.; Seattle, Wash.; Tampa, Fla.; Phoenix, Ariz.; and Miami, Fla.  Additionally, the data shows only four cities that improved in making mortgage payments: Cleveland, Ohio; Minneapolis, Minn.; Denver, Colo.; and Detroit, Mich. *All payment data is based on 60-day delinquencies. Learn more about managing credit.  

A study released in October 2011 for the S&P/Experian Consumer Credit Default Indices showed that first mortgage default rates rose to 2.08 percent in October from September's 1.99 percent. Auto loans, second mortgages and bank cards all saw drops in their default rates. Looking at regions, Chicago saw the largest default rate increase, moving from 2.47 percent to 2.64 percent. Miami fell the most, to 4.16 percent, well below the near 19 percent default rate it had a little more than two years ago. Access previous issues of the S&P/Experian Consumer Credit Default Indices. Source: October 2011 S&P/Experian Consumer Credit Default Indices.  

Organizations approach agency management from three perspectives: (1) the need to audit vendors to ensure that they are meeting contractual, financial and legal compliance requirements; (2) ensure that the organization’s clients are being treated fairly and ethically in order to limit brand reputation risk and maintain a customer-centric commitment; (3) maximize revenue opportunities through collection of write-offs through successful performance management of the vendor. Larger organizations manage this process often by embedding an agency manager into the vendor’s site, notably on early out / pre charge-off outsourcing projects. As many utilities leverage the services of outsourcers for managing pre-final bill collections, this becomes an important tool in managing quality and driving performance. The objective is to build a brand presence in the outsourcer’s site, and focusing its employees and management team on your customers and daily performance metrics and outcomes. This is particularly useful in vendor locations in which there are a number of high profile client projects with larger resource pools competing for attention and performance, as an embedded manager can ensure that the brand gets the right level of attention and focus. For post write off recovery collections in utility companies, embedding an agency manager becomes cost-prohibitive and less of an opportunity from an ROI perspective, due to the smaller inventories of receivables at any agency. We urge that clients not spread out their placements to many vendors where each project is potentially small, as the vendors will more likely focus on larger client projects and dilute the performance on your receivables. Still, creating a smaller pool of agency partners often does not provide a resource pool of >50-100 collectors at a vendor location to warrant an embedded agency management approach. Even without an embedded agency manager, organizations can use some of the techniques that are often used by onsite managers to ensure that the focus is on their projects, and maintain an ongoing quality review and performance management process. The tools are fairly common in today’s environment --- remote monitoring and quality reviews of customer contacts (i.e., digital logging), monthly publishing of competitive liquidation results to a competitive agency process with market share incentives, weekly updates of month-to-date competitive results to each vendor to promote competition, periodic “special” promotions / contests tied to performance where below target MTD, and monthly performance “kickers” for exceeding monthly liquidation targets at certain pre-determined levels. Agencies have selective memory, and so it’s vital to keep your projects on their radar. Remember, they have many more clients, all of whom want the same thing – performance. Some are less vocal and focused on results than others. Those that are always providing competitive feedback, quality reviews and feedback, contests, and market share opportunities are top of mind, and generally get the better selection of collectors, team /project managers, and overall vendor attention. The key is to maintain constant visibility and a competitive atmosphere. Over the next several weeks, we'll dive into more detail for each of these areas: Auditing and monitoring, onsite and remote Best practices for improving agency performance Scorecards and strategies Market share competition and scorecards

Findings from the Q2 Experian Business Benchmark Report showed that the amount of delinquent debt has increased significantly for the largest and smallest businesses. Very large businesses (those with more than 1,000 employees) had the greatest shift in percentage of dollars delinquent, shifting from 11.6 percent in June 2010 to 18.2 percent in June 2011, and very small businesses (those with one to four employees) had the greatest shift in percentage of dollars considered severely delinquent, increasing from 9.9 percent to 11.7 percent year over year. Conversely, the Q2 report indicated that mid-size businesses (those with 100 to 249 employees) have shown the greatest improvement in percentage of dollars delinquent and severely delinquent, reducing their debt by as much as 7.3 percent and 35.8 percent, respectively, year over year. Download previous reports and view a visual representation of this data broken down by state in an interactive map. Source: Download the current Business Benchmark Report  

Customers see a data breach and the loss of their personal data as a threat to their security and finances, and with good reason. Identity theft occurs every four seconds in the United States, according to figures from the Federal Trade Commission. As consumers become savvier about protecting their personal data, they expect companies to do the same. And to go the extra mile for them if a data breach occurs. That means providing protection through extended fraud resolution that holds up under scrutiny. Protection that offers peace of mind, not just in the interim but years down the line. The stronger the level of protection you provide to individuals affected in a breach, the stronger their brand loyalty. Just like with any product, consumers can tell the difference between valid protection products that work and ones that just don’t. Experian® Data Breach Resolution takes care to provide the former, protection that works for your customers or employees affected in a breach and that reflects positively on you, as the company providing the protection. Experian’s ProtectMyID® Elite or ProtectMyID Alert provides industry-leading identity protection and, now, extended fraud resolution care. ExtendCARE™ now comes standard with every ProtectMyID data breach redemption membership, at no additional cost to you or the member. With ExtendCARE, the identity theft resolution portion of ProtectMyID remains active even when the full membership isn’t. ExtendCARE allows members to receive personalized assistance, not just advice, from an Identity Theft Resolution Agent. This high level of assistance is available any time identity theft occurs after individuals redeem their ProtectMyID memberships. Extended fraud resolution from a global leader like Experian can put consumers’ minds at ease following a breach. If we can help you with pre-breach planning or data breach resolution, reach out to us via our contact form on our contact page.

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