Regulatory Compliance

By: Teri Tassara In my blog last month, I covered the importance of using quality credit attributes to gain greater accuracy in risk models.  Credit attributes are also powerful in strengthening the decision process by providing granular views on consumers based on unique behavior characteristics.  Effective uses include segmentation, overlay to scores and policy definition – across the entire customer lifecycle, from prospecting to collections and recovery. Overlay to scores – Credit attributes can be used to effectively segment generic scores to arrive at refined “Yes” or “No” decisions.  In essence, this is customization without the added time and expense of custom model development.  By overlaying attributes to scores, you can further segment the scored population to achieve appreciable lift over and above the use of a score alone. Segmentation – Once you made your “Yes” or “No” decision based on a specific score or within a score range, credit attributes can be used to tailor your final decision based on the “who”, “what” and “why”.  For instance, you have two consumers with the same score. Credit attributes will tell you that Consumer A has a total credit limit of $25K and a BTL of 8%; Consumer B has a total credit limit of $15K, but a BTL of 25%.   This insight will allow you to determine the best offer for each consumer. Policy definition - Policy rules can be applied first to get the desirable universe.  For example, an auto lender may have a strict policy against giving credit to anyone with a repossession in the past, regardless of the consumer’s current risk score. High quality attributes can play a significant role in the overall decision making process, and its expansive usage across the customer lifecycle adds greater flexibility which translates to faster speed to market.  In today’s dynamic market, credit attributes that are continuously aligned with market trends and purposed across various analytical are essential to delivering better decisions.  

By: Zach Smith On September 13, the Consumer Financial Protection Bureau (CFPB) announced final amendments to the mortgage rules that it issued earlier this year. The CFPB first issued the final mortgage rules in January 2013 and then released subsequent amendments in June. The final amendments also make some additional clarifications and revisions in response to concerns raised by stakeholders.     The final modifications announced by the CFPB in September include: Amending the prohibition on certain servicing activities during the first 120 days of a delinquency to allow the delivery of certain notices required under state law that may provide beneficial information about legal aid, counseling, or other resources. Detailing the procedures that servicers should follow when they fail to identify or inform a borrower about missing information from loss mitigation applications, as well as revisions to simplify the offer of short-term forbearance plans to borrowers suffering temporary hardships. Clarifying best practices for informing borrowers about the address for error resolution documents. Exempting all small creditors, including those not operating predominantly in rural or underserved areas, from the ban on high-cost mortgages featuring balloon payments. This exemption will continue for the next two years while the CFPB re-examines the definitions of “rural” and “underserved.” Explaining the "financing” of credit insurance premiums to make clear that premiums are considered to be “financed” when a lender allows payments to be deferred past the month in which it’s due. Clarifying the circumstances when a bank’s teller or other administrative staff is considered to be a “loan originator” and the instances when manufactured housing employees may be classified as an originator under the rules. Clarifying and revising the definition of points and fees for purposes of the qualified mortgage cap on points and fees and the high-cost mortgage points and fees threshold. Revising effective dates of many loan originator compensation rules from January 10, 2014 to January 1, 2014. While the industry continues to advocate for an extension of the effective date to provide additional time to implement the necessary compliance requirements, the CFPB insists that both lenders and mortgage servicers have had ample time to comply with the rules. Most recently, in testimony before the House Financial Services Committee, CFPB Director Richard Cordray stated that “most of the institutions have told us that they will be in compliance” and he didn’t foresee further delays. Related Research Experian's Global Consulting Practice released a recent white paper, CCAR: Getting to the Real Objective, that suggests how banks, reviewers and examiners can best actively manage CCAR's objectives with a clear dual strategy that includes both short-term and longer-term goals for stress-testing, modeling and system improvements.  Download the paper to understand how CCAR is not a redundant set of regulatory compliance exercices; its effects on risk management include some demanding paradigm shifts from traditional approaches. The paper also reviews the macroeconomic facts around the Great Recession revealing some useful insights for bank extreme-risk scenario development, econometric modeling and stress simulations. Related Posts Where Business Models Worked, and Didn't, and Are Most Needed Now in Mortgages Now That the CFPB Has Arrived, What's First on It's Agenda Can the CFPB Bring Debt Collection Laws into the 21st Centrury

Billions of dollars are being issued in fraudulent refunds at the state and federal level.  Most of the fraud can be categorized around identity theft.  An example of this type of fraud may include fraudsters acquiring the Personal Identifying Information (PII) from a deceased individual, buying it from someone not filing or otherwise stealing it from legitimate sources like a doctor’s office.  The PII is then used to fill out tax returns, add fraudulent income information and request bogus deductions. Additional forms of tax refund fraud may include: Direct consumer tax refund fraud using real PII of US Citizens to file fraudulent tax returns and claim bogus deductions thereby increasing refund amounts EITC (Earned Income Tax Credit)/ACC (Additional Childcare Credit) fraud which is usually perpetrated with the assistance of a tax preparer and claiming improper cash payments and/or deductions for non-existent children. Tax Preparer Fraud where tax preparers purposefully submit false information on tax returns or file false returns for clients. Under reporting of income on tax filings. Taking multiple Homestead Exemptions for tax credit. Since this Fraud more often occurs as an early filing using Fraudulent or stolen PII the individual consumer is at risk for long term Identity issues. Exacerbating the tax refund fraud problem: The majority of returns that request refunds are now filed online (83% of all federal filings in 2012 were online) -if you file online, there is no need to submit a W-2 form with that online filing.  If your employment information cannot be pulled into the forms by your tax software you can fill it in manually.  The accuracy of information regarding employer and wage information for which deductions are based, is only verified after the refund is issued.  Refunds directly deposited - filers now have the option to have their refunds deposited into a bank account for faster receipt.   Once these funds are deposited and withdrawn there is no way to trace where the funds have gone. Refunds provided on debit cards – filers can request their refund in the form of a debit card.  This is an even bigger problem than bank account deposits because once issued, there is no way to trace who uses a debit card and for what purpose. So what do you need to look for when reviewing tax fraud prevention tools? Look for a provider that has experience in working with state and federal government agencies.  Proven expertise in this domain is critical, and experience here means that the provider has cleared the disciplined review process that the government requires for businesses they do business with. Look for providers with relevant certifications for authentication services, such as the Kantara Identity Assurance Framework for levels of identity assurance.  Look for providers that can authenticate users by verifying the device they’re using to access your applications.  With over 80% of tax filings occurring online, it is critical that any identity proofing strategy also allows for the capability to verify the source or device used to access these applications. Since tax fraudsters don’t limit their use of stolen IDs to tax fraud and may also use them to perpetrate other financial crimes such as opening lines of credit – you need to be looking at all avenues of fraudulent activity If fraud is detected and stopped, consider using a provider that can offer post fraud mitigation processes for your customers/potential victims. Getting tax refunds and other government benefits into the right hands of their recipients is important to everyone involved.  Since tax refund fraud detection is a moving target, it’s buyer beware if you hitch your detection efforts to a provider that has not proven their expertise in this unique space.  

All skip tracing data is the same, right? Not exactly. While there are many sources of consumer contact data available to debt collectors, the quality, freshness, depth and breadth can vary significantly. Just as importantly, what you ultimately do or don't do with the data depends on several factors such as: Whether or not the debt is worth your while to pursue How deep and fresh the data is What if no skip data is available, and, What happens if there is no new information available when you go to your skip-tracing vendor requesting new leads? So what's the best way for your company to locate debtors? What data sources are right for you? Check out my recent article in Collections and Credit Risk for some helpful advice, and be sure to check out our other debt collection industry blog posts for best practices, tips and tricks on ways to recover more debt, faster. What data sources do you find most beneficial to your business and why? Let us know by commenting below.

Gone are the days when validating scoring models was a thing you did when you got around to it. Besides that fact that the OCC wants models validated at least once a year, it’s just good business sense to make sure your tools are working as expected. At a minimum, the OCC wants back testing, stress testing, benchmarking and sensitivity analysis, but there is another aspect to validations that needs to be taken into consideration. Most lenders do not rely exclusively on a scoring model of their decisioning (or at least they shouldn’t). Whether it’s a dual score strategy or attribute overlay, additional underwriting criteria is often used to help refine and optimize decision strategies. However, those same overlays need to be incorporated into the model validation process so that the results are not misleading. VantageScore® Solutions, LLC has just published a concise white paper offering excellent examples of how to make sure your overlay criteria are an integral part of the overall validation process, ensuring your effort here are yielding the right results. And while on the topic of model validation, next time I’ll review what to do when you have no idea what to test for. Stay tuned!

Not surprisingly, bankcard utilization is the highest among subprime consumers with VantageScore D and F tiers having average bankcard utilization rates of 68% and 81% respectively. In comparison, VantageScore A tier (super prime) consumers had an average bankcard utilization rate of 6% and VantageScore B tier (prime) consumers had an average bankcard utilization rate of 15%. Join our panel of experts on October 23 to hear from industry experts on key regulations that are changing the way banks need to conduct business in order to grow and stay profitable. Source: Experian Oliver Wyman Market Intelligence Reports.

By: Kyle Aiman Let’s face it, debt collectors often get a bad rap.  Sure, some of it is deserved, but the majority of the nation’s estimated 157,000 collectors strive to do their job in a way that will satisfy both their employer and the debtor.  One way to improve collector/debtor interaction is for the collector to be trained in consumer credit and counseling. In a recent article published on Collectionsandcreditrisk.com, Trevor Carone, Vice President of Portfolio and Collection Solutions at Experian, explored the concept of using credit education to help debt collectors function more like advisors instead of accusers.  If collectors gain a better understanding of consumer credit – how to read a credit report, how items may affect a credit score, how a credit score is compiled and what factors influence the score – perhaps they can offer suggestions for improvement. Will providing past-due consumers with a plan to help improve their credit increase payments?  Read the article and let us know what you think!

By: Ken Pruett The great thing about being in front of customers is that you learn something from every meeting.  Over the years I have figured out that there is typically no “right” or “wrong” way to do something.  Even in the world of fraud and compliance I find that each client's approach varies greatly.  It typically comes down to what the business need is in combination with meeting some sort of compliance obligation like the Red Flag Rules or the Patriot Act.  For example, the trend we see in the prepaid space is that basic verification of common identity elements is really the only need.   The one exception might be the use of a few key fraud indicators like a deceased SSN.  The thought process here is that the fraud risk is relatively low vs. someone opening up a credit card account.  So in this space, pass rates drive the business objective of getting customers through the application process as quickly and easily as possible….while meeting basic compliance obligations. In the world of credit, fraud prevention is front and center and plays a key role in the application process.  Our most conservative customers often use the traditional bureau alerts to drive fraud prevention.  This typically creates high manual review rates but they feel that they want to be very customer focused. Therefore, they are willing to take on the costs of these reviews to maintain that focus.  The feedback we often get is that these alerts often lead to a high number of false positives. Examples of messages they may key off of are things like the SSN not being issued or the On-File Inquiry address not matching.  The trend is this space is typically focused on fraud scoring. Review rates are what drive score cut-offs leading to review rates that are typically 5% or less.  Compliance issues are often resolved by using some combination of the score and data matching. For example, if there is a name and address mismatch that does not necessarily mean the application will kick out for review.  If the Name, SSN, and DOB match…and the score shows very little chance of fraud, the application can be passed through in an automated fashion.  This risk based approach is typically what we feel is a best practice.  This moves them away from looking at the binary results from individual messages like the SSN alerts mentioned above. The bottom line is that everyone seems to do things differently, but the key is that each company takes compliance and fraud prevention seriously.  That is why meeting with our customers is such an enjoyable part of my job.

Last week, a group of us came together for a formal internal forum where we had the opportunity to compare notes with colleagues, hear updates on the challenges clients are facing and brainstorm solutions to client business problems across the discipline areas of analytics, fraud and software.   As usual, fraud prevention and fraud analytics were key areas of discussion but what was also notable was how big a role compliance is playing as a business driver.  First party fraud and identity theft detection are important components, sure, but as the Consumer Financial Protection Bureau (CFPB) gains momentum and more teeth, the demand for compliance accommodation and consistency grows critical as well.  The role of good fraud management is to help accomplish regulatory compliance by providing more than just fraud risk scores, it can help to: Know Your Customer (KYC) or Customer Information Program (CIP) details such as the match results and level of matching across name, address, SSN, date of birth, phone, and Driver’s License. Understand the results of checks for high risk identity conditions such as deceased SSN, SSN more frequently used by another, address mismatches, and more. Perform a check against the Office of Foreign Asset Control’s SDN list and the details of any matches. And while some fraud solutions out there make use of these types of comparisons when generating a score or decision, they may not pass these along to their customers.  And just think how valuable these details can be for both consistent compliance decisions and creating an audit trail for any possible audits.  

The Fed’s Comprehensive Capital Analysis and Review (CCAR) and Capital Plan Review (CapPR) stress scenarios depict a severe recession that, although unlikely, the largest U.S. banks must now account for in their capital planning process.  The bank holding companies’ ability to maintain adequate capital reserves, while managing the risk levels of growing portfolios are key to staying within the stress test parameters and meeting liquidity requirements. While each banks’ portfolios will perform differently, as a whole, the delinquency performance of major products such as Auto, Bankcard and Mortgage continues to perform well.   Here is a comparison between the latest quarter results and two years ago from the Experian – Oliver Wyman Market Intelligence Reports.   Although not a clear indication of how well a bank will perform against the hypothetical scenario of the stress tests, measures such as Probability of Default, Loss Given Default and Exposure at Default to indicate a bank’s risk may be dramatically improved from just a few years ago given recent delinquency trends in core portfolios. Recently we released a white paper that provides an introduction to Basel III regulation and discusses some of its impact on banks and the banking system.  We also present a real business case showing how organizations turn these regulatory challenges into buisness opportunities by optimizing their credit strategies.   Download the paper - Creating value in challenging times: An innovative approach to Basel III compliance.  

By: Shannon Lois These are challenging times for large financial institutions. Still feeling the impact from the financial crisis of 2007, the banking industry must endure increased oversight, declining margins, and fierce competition—all in a lackluster economy. Financial institutions are especially subject to closer regulatory scrutiny. As part of this stepped-up oversight, the Federal Reserve Board (FRB) conducts annual assessments, including  “stress tests”, of the capital planning processes and capital adequacy of BHCs to ensure that these institutions can continue operations in the event of economic distress. The Fed expects banks to have credible plans, which are evaluated across a range of criteria, showing that they have adequate capital to continue to lend, even under adverse economic conditions. Minimum capital standards are governed by both the FRB and under Basel III. The International Basel Committee established the Basel accords to provide revised safeguards following the financial crisis, as an effort to ensure that banks met capital requirements and were not overly leveraged. Using input data provided by the BHCs themselves, FRB analysts have developed stress scenario methodology for banks to follow. These models generate loss estimates and post-stress capital ratios. The CCAR includes a somewhat unnerving hypothetical scenario that depicts a severe recession in the U.S. economy with an unemployment rate of 13%, a 50% drop in equity prices, and 21% decline in housing market. Stress testing is intended to measure how well a bank could endure this gloomy picture. Between meeting the compliance requirements of both BASEL III and the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR), financial institutions commit sizeable time and resources to administrative tasks that offer few easily quantifiable returns. Nevertheless—in addition to ensuring they don’t suddenly discover themselves in a trillion-dollar hole—these audit responsibilities do offer some other benefits and considerations.

The CFPB, the FTC and other regulatory authorities have been building up their presence in debt collections. Are you in the line of fire, or are you already prepared to effectively manage your riskiest accounts?  This year’s collections headlines show an increased need to manage account risk. Consumers have been filing suits for improper collections under the Fair Debt Collection Practices Act (FDCPA), the Servicemembers Civil Relief Act (SCRA), and the Telephone Consumer Protection Act (TCPA), to name a few. Agencies have already paid millions in fines due to increased agency scrutiny.   One collections mistake could cost thousands or even millions to your business—a cost any collector would hate to face. So, what can you do about better managing your regulatory risk?  1.       First of all, it is always important to understand and follow the collection regulations associated with your accounts. 2.       Secondly, follow the headlines and pay close attention to your regulatory authorities.  3.       Lastly, leverage data filtering tools to identify accounts in a protected status. The best solution to help you is a streamlined tool that includes filters to identify multiple types of regulatory risk in one place. At minimum, you should be able to identify the following types of risk associated with your accounts: Bankruptcy status and details Deceased indicator and dates Military indicator Cell phone type indicator Fraud indicators Litigious consumers Why wait? Start identifying and mitigating your risk as early in your collections efforts as possible. 

Contributed by: David Daukus As the economy is starting to finally turn around albeit with hiccups and demand for new credit picking up, creditors are loosening their lending criteria to grab market share. However, it is important for lenders to keep lessons from the past to avoid the same mistakes. With multiple government agencies such as the CFPB, OCC, FDIC and NCUA and new regulations, banking compliance is more complex than ever. That said, there are certain foundational elements, which hold true. One such important aspect is keeping a consistent and well-balanced risk management approach.  Another key aspect is around concentration risk. This is where a significant amount of risk is focused in certain portfolios across specific regions, risk tiers, etc. (Think back to 2007/2008 where some financial institutions focused on making stated-income mortgages and other riskier loans.) In 2011, the Federal Reserve Board of Governors released a study outlining the key reasons for bank failures. This review focused mainly on 20 bank failures from June 29, 2009 thru June 30, 2011 where more in-depth reporting and analysis had been completed after each failure. According to the Federal Reserve Board of Governors, here are the four key reasons for the failed banks: (1) Management pursuing robust growth objectives and making strategic choices that proved to be poor decisions; (2) Rapid loan portfolio growth exceeding the bank’s risk management capabilities and/or internal controls; (3) Asset concentrations tied to commercial real estate or construction, land, and land development (CLD) loans; (4) Management failing to have sufficient capital to cushion mounting losses. So, what should be done? Besides adherence to new regulations, which have been sprouting up to save us all from another financial catastrophe, diversification of risk maybe the name of the game. The right mix of the following is needed for a successful risk management approach including the following steps: Analyze portfolios and needs Predict high risk accounts Create comprehensive credit policies Decision for risk and retention Refresh scores/attributes and policies So, now is a great time to renew your focus. Source: Federal Reserve Board of Governors: Summary Analysis of Failed Bank Reviews  (9/2011)

By: Stacy Schulman Earlier this week the CFPB announced a final rule addressing its role in supervising certain credit reporting agencies, including Experian and others that are large market participants in the industry. To view this original content, Experian and the CFPB - Both Committed to Helping Consumers. During a field hearing in Detroit, CFPB Director Richard Cordray’s spoke about a new regulatory focus on the accuracy of the information received by the credit reporting companies, the role they play in assembling and maintaining that information, and the process available to consumers for correcting errors. We look forward to working with CFPB on these important priorities. To read more about how Experian prioritizes these information essentials for consumers, clients and shareholders, read more on the Experian News blog. Learn more about Experian's view of the Consumer Financial Protection Bureau. ___________________ Original content provided by: Tony Hadley, Senior Vice President of Government Affairs and Public Policy About Tony: Tony Hadley is Senior Vice President of Government Affairs and Public Policy for Experian. He leads the corporation’s legislative, regulatory and policy programs relating to consumer reporting, consumer finance, direct and digital marketing, e-commerce, financial education and data protection. Hadley leads Experian’s legislative and regulatory efforts with a number of trade groups and alliances, including the American Financial Services Association, the Direct Marketing Association, the Consumer Data Industry Association, the U.S. Chamber of Commerce and the Interactive Advertising Bureau. Hadley is Chairman of the National Business Coalition on E-commerce and Privacy.

As a scoring manager, this question has always stumped me because there was never a clear answer. It simply meant less than prime – but how much less? What does the term actually mean? How do you quantify something so subjective? Do you assign it a credit score? Which one? There were definitely more questions than answers. But a new proposed ruling from the FDIC could change all that – at least when it comes to large bank pricing assessments. The proposed ruling does a couple of things to bring clarity to the murky waters of the subprime definition. First, it replaces the term “subprime” with “high-risk consumer loans”. Then they go one better: they quantify high-risk as having a 20% probability of default or higher. Finally, something we can calculate! The arbitrary 3-digit credit score that has been used in the past to define the line between prime and subprime has several flaws. First of all, if a subprime loan is defined as having any particular credit score, it has to be for a specific version of a specific model at a specific time. That’s because the default rates associated to any given score is relative to the model used to calculate it. There are hundreds of custom-build and generic scoring models in use by lenders today – does that single score represent the same level of risk to all of them? Absolutely not. And even if all risk models were calibrated exactly the same, just assigning credit risk a number has no real meaning over time. We all know what scores shift, that consumer credit behavior is not the same today as it was just 6 years ago. In 2006, if a score of X represented a 15% likelihood of default, that same score today could represent 20% or more. It is far better to align a definition of risk with its probability of default to begin with! While it only currently applies to the large bank pricing assessments with the FDIC, this proposed ruling is a great step in the right direction. As this new approach catches on, we may see it start to move into other polices and adopted by various organizations as they assess risk throughout the lending cycle.