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. 

The FDIC has proposed a new rule that will change the way large lenders define and calculate risk for their FDIC Deposit Insurance Assessment. The revised definitions in the proposed rule rely on "probability of default" and eliminate all references to the traditional three-digit credit score used to calculate subprime exposure -- changing the way large banks calculate their FDIC assessments. This new ruling will allow lenders to uniformly assess risk in their portfolios--regardless of the scoring models they use. View a recent webinar to hear from a panel of experts on the "The New Subprime Definition: Who is subprime now?" Source: FDIC Proposed Ruling Announcement

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)

a.wpbutton:hover {text-decoration: none !important;} Please select from the below list of recent Experian white papers to gain more insight into topics relevant to your business needs and goals. Converting Information to Intelligence - Current Trends in Mitigating Small-Business Risk Through Analytics Download Now As former Chrysler CEO Lee Iacocca put it, “Even a correct decision is wrong when taken too late.” Portfolio managers who oversee small-business risks know this well. They realize it when they make a decision about approving or rejecting a loan request and recognize later the correct decision would have been clearer if they could have weighed additional data and used improved analytics. This white paper presents some of these latest trends affecting the small-business lending landscape. Specifically, it illuminates how companies are using the new robust data sources and analytic tools – from consortium data to rapid model customization – to maximize their interactions with small-business clients with greater accuracy. Creating Value In Challenging Times: An Innovative Approach To Basel III Compliance Download Now In this paper, we will provide an introduction to Basel III regulation and discuss some of its impact on banks and the banking system. We also will present a real business case showing how organizations turn these regulatory challenges into business opportunities by optimizing their credit strategies. Turning the Tide - Managing Troubled Portfolios Download Now The economy may be recovering and the credit picture improving, but lending institutions still find themselves coping with some troubled portfolios. Plus, they always need to be prepared to identify high-risk accounts. What they can discover is that turning around a challenged loan portfolio requires taking just a few basic steps. This white paper explores how in Arizona Federal Credit Union reversed its misfortunes to emerge from the economic crisis prosperous and with $30 million in profits, illuminating what lenders can do to manage troubled portfolios and reverse poor performance. Get To Know Your Customers: Account Linking and Advanced Customer Management For Utility Providers Download Now In this paper, we will explore the practice of customer management and key capabilities to improve effectiveness in a complex business environment. It will specifically look at opportunities within the utilities marketplace for account linking and deploying customer-level decisions to the business to help drive portfolio performance retain and grow profitability and strengthen customer relationships.   State of the U.S. Credit Markets - At Last, Signs of Real Recovery Download Now The economy’s recovery from the Great Recession may have started slowly, but it is accelerating – and it’s genuine. Economic indicators tell the story of improving business prospects. As the recovery begins to take shape, many consumers are now turning the corner with it and will present as viable candidates to grow your portfolio profitably. It’s difficult to find any solace in a recession, yet it can serve as an opportunity. 2012 will be the year for lenders to return to pre-recession strategies if they are to grow significantly. This economic rebound is real, and savvy lenders – just like those marathon runners and Tour de France bicyclists – recognize that it’s in the uphill stage of the race that the lead changes.   Home Equity Indicators with New Credit Data Methods for Improved Mortgage Risk Analytics This whitepaper describes new improvements in local housing market indicators and analytics derived from local-area credit and local real estate information. In the run up to the U.S. housing downturn and financial crisis, perhaps the greatest single risk management shortfall was poorly predicted home prices and borrower home equity. Understanding Automotive Loan Charge-off Patterns Can Help Mitigate Lender Risk Loan delinquency rates are one of the most important statistics to track in the automotive finance industry. If consumers are not repaying loans on time, it puts billions of dollars at risk. When high dollar volumes are at risk, it is a negative for everyone in the lending world, including consumers, automotive retailers and lenders themselves. While conditions have improved considerably the past few years, lenders still need to remain vigilant about where delinquencies are most likely to occur. It’s an unavoidable fact that some loans will have to be charged off. Understanding where and how these charge offs occur provides important learning for the industry. Experian Automotive has found several clear patterns that can help lenders better understand the root cause of loan delinquencies. Strategic Customer Management for Business Banking Portfolios Download Now This white paper explores business banking customer management and the benefits that can be realized from introducing a strategic approach. It will look at the features of a leading-edge approach to business banking customer management and provide practical insights on key areas.   Universe Expansion - Growth Strategies in the Evolving Consumer Market Download Now As the economy gains strength, lenders are engaging in an increasingly fierce competition to entice the best candidates to their portfolios and to grow their lending business. In waging this battle, however, many lenders are concentrating on the super-prime and prime consumer segments. Prospecting strategies currently in use often do not identify the right subpopulations within the near-prime segment. Specifically, there are prospects within the near-prime segment that exhibit low bad rates compared with the broader near-prime consumer base. It is imperative that lenders redefine their targeting/underwriting strategies to prospect and acquire in the near prime space. A variety of prospecting strategies are now available that compliment and expand on a lender’s current growth initiatives – now is the time to ensure that optimal strategies are in place and that opportunities within near-prime are not overlooked. Interested in more thought leadership? Visit our Business Resources page on  Experian.com

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.

With the constant (and improving!) changes in the consumer credit landscape, understanding the latest trends is vital for institutions to validate current business strategies or make adjustments to shifts in the marketplace.  For example, a recent article in American Banker described how a couple of housing advocates who foretold the housing crisis in 2005 are now promoting a return to subprime lending. Good story lead-in, but does it make sense for “my” business?  How do you profile this segment of the market and its recent performance?  Are there differences by geography?  What other products are attracting this risk segment that could raise concerns for meeting a new mortgage obligation?   There is a proliferation of consumer loan and credit information online from various associations and organizations, but in a static format that still makes it challenging to address these types of questions. Fortunately, new web-based solutions are being made available that allow users to access and interrogate consumer trade information 24x7 and keep abreast of constantly changing market conditions.  The ability to manipulate and tailor data by geography, VantageScore risk segments and institution type are just a mouse click away.  More importantly, these tools allow users to customize the data to meet specific business objectives, so the next subprime lending headline is not just a story, but a real business opportunity based on objective, real-time analysis.

The pressures for both credit unions and banks, to generate returns to drive greater earnings are ever present. According to recent data released by the National Credit Union Administration, the nation's 7,019 federally-insured credit unions added 667,000 new members in the first quarter of 2012 to a record of 92.5 million. To offset these pressures, portfolio managers are aggressively expanding their policies and practices to drill more deeply and frequently into their portfolios. Increasingly, this requires the ability to trend consumer credit data, identify specific member metrics, and track those changes over time. Redefining the information your portfolios provide can by key to developing increased ROI. Learn how trended data can help you maximize your strategies and process to produce results in today's complex business environments. Source: How to drill deeper into your portfolio

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.

The cumulative effect of Basel III is expected to have a substantial impact on capital requirements. The total minimum regulatory capital will increase from 8 percent to 10.5 percent. For institutions that are considered "systematically important," an additional holding requirement may be imposed of up to 3.5 percent. Download our white paper to learn more about how your peers are reacting to Basel III and how Experian can help banks to optimize risk-weighted assets. Source: Creating value in challenging times: An innovative approach to Basel III compliance by Experian's Global Consulting Practice

A recent survey of 1,000 representative American consumers showed that while 78 percent of respondents are aware that they have more than one credit score, some key misperceptions remain: • Fewer than half (44 percent) understand that a credit score typically measures risk of not repaying loans rather than amount of debt (22 percent), financial resources (21 percent) or other factors. • More than half still think that a person's age (56 percent) and marital status (54 percent) are factors used to calculate credit scores, and 21 percent incorrectly believe that ethnic origin is a factor. Click here to get the facts on the types of credit scores and what influences them. Source: VantageScore® press release, May 2012. VantageScore® is owned by VantageScore Solutions, LLC.

By: Mike Horrocks This week, several key financial institutions will be submitting their “living wills” to Washington as part of the Dodd-Frank legislation.  I have some empathy for how those institutions will feel as they submit these living wills.  I don’t think that anyone would say writing a living will is fun.  I remember when my wife and I felt compelled to have one in place as we realized that we did not want to have any questions unanswered for our family. For those not familiar with the concept of the living will, I thought I would first look at the more widely known medical description.   The Mayo Clinic describes living wills as follows, “Living wills and other advance directives describe your preferences regarding treatment if you're faced with a serious accident or illness. These legal documents speak for you when you're not able to speak for yourself — for instance, if you're in a coma.”   Now imagine a bank in a coma. I appreciate the fact that these living wills are taking place, but pulling back my business law books, I seem to recall that one of the benefits of a corporation versus say a sole proprietorship is that the corporation can basically be immortal or even eternal.  In fact the Dictionary.com reference calls out that a corporation has “a continuous existence independent of the existences of its members”.  So now imagine a bank eternally in a coma. Now, I cannot avoid all of those unexpected risks that will come up in my personal life, like an act of God, that may put me into a coma and invoke my living will, but I can do things voluntarily to make sure that I don’t visit the Emergency Room any time soon.  I can exercise, eat right, control my stress and other healthy steps and in fact I meet with a health coach to monitor and track these things. Banks can take those same steps too.  They can stay operationally fit, lend right, and monitor the stress in their portfolios.   They can have their health plans in place and have a personal trainer to help them stay fit (and maybe even push them to levels of fitness they did not think they could reach).  Now imagine a fit, strong bank. So as printers churn, inboxes get filled, and regulators read through thousands of pages of bank living wills, let’s think of the gym coach, or personal trainer that pushed us to improve and think about how we can be healthy and fit and avoid the not so pleasant alternatives of addressing a financial coma.

By: Joel Pruis From a score perspective we have established the high level standards/reporting that will be needed to stay on top of the resulting decisions.  But there is a lot of further detail that should be considered and further segmentation that must be developed or maintained. Auto Decisioning A common misperception around auto-decisioning and the use of scorecards is that it is an all or nothing proposition.  More specifically, if you use scorecards, you have to make the decision entirely based upon the score.  That is simply not the case.  I have done consulting after a decisioning strategy based upon this misperception and the results are not pretty.  Overall, the highest percentage for auto-decisioning that I have witnessed has been in the 25 – 30% range.  The emphasis is on the “segment”.  The segments is typically the lower dollar requests, say $50,000 or less, and is not the percentage across the entire application population.  This leads into the discussion around the various segments and the decisioning strategy around each segment. One other comment around auto-decisioning.  The definition related to this blog is the systematic decision without human intervention.  I have heard comments such as “competitors are auto-decisioning up to $1,000,000”.  The reality around such comments is that the institution is granting loan authority to an individual to approve an application should it meet the particular financial ratios and other criteria.  The human intervention comes from verifying that the information has been captured correctly and that the financial ratios make sense related to the final result.  The last statement is the key to the disqualification of “auto-decisioning”.  The individual is given the responsibility to ensure data quality and to ensure nothing else is odd or might disqualify the application from approval or declination.  Once a human eye is looking at an application, judgment comes into the picture and we introduce the potential for inconsistencies and or extension of time to render the decision.  Auto-decisioning is just that “Automatic”.  It is a yes/no decision and is based upon objective factors that if met, allow the decision to be made.  Other factors, if not included in the decision strategy, are not included. So, my fellow credit professionals, should you hear someone say they are auto-decisioning a high percent of their applications or a high dollar amount for an application, challenge, question and dig deeper.  Treat it like the fishing story “I caught a fish THIS BIG”. No financials segment The highest volume of applications and the lowest total dollar production area of any business banking/small business product set.  We had discussed the use of financials in the prior blog around application requirements so I will not repeat that discussion here.  Our focus will be on the  decisioning of these applications.  Using score and application characteristics as the primary data source, this segment is the optimal segment for auto-decisioning.  Speeds the  decision process and provides the greatest amount of consistency in the decisions rendered.  Two key areas for this segment are risk premiums and scorecard validations. The risk premium is important as you are going to accept a higher level of losses for the sake of efficiencies in the underwriting/processing of the application.  The end result is lower operational costs, relatively higher credit losses but the end yield on this segment meets the required, yet practical, thresholds for return. The one thing that I will repeat from a prior blog is that you may request financials after the initial review but the frequency should be low and should also be monitored.  The request of financials should not be the “belt and suspenders” approach.  If you know what the financials are likely to show, then don’t request them.  They are unnecessary.  You are probably right and the collection of the financials will only serve to elongate the response time, frustrate everyone involved in the process and not change the expected results. Financials segment The relatively lower unit volume but the higher dollar volume segment.  Likely this segment will have no auto-decisioning as the review of financials typically will mandate the judgmental review.  From an operational perspective, these are high dollar and thus the manual review does not push this segment into a losing proposition.  From a potential operational lift perspective, the ability to drive a higher volume of applications into auto-decisioning is simply not available as we are talking probably less than 40% (if not fewer) of all applications in this segment. In this segment, the consistency becomes more difficult as the underwriter tends to want to put his/her own approach on the deal.  Standardization of the analysis approach (at least initially) is critical for this segment.  Consistency in the underwriting and the various criteria allows for greater analysis to determine where issues are developing or where we are realizing the greatest success.  My recommended approach is to standardize (via automation in the origination platform) the various calculations in a manner that will generate the most conservative approach.  Bluntly put, my approach was to attempt to make the deal as ugly as possible and if it still passed the various criteria, no additional work was needed nor was there any need for detailed explanation around how I justified the deal/request.  Only if it did not meet the criteria using the most conservative approach would I need to do any work and only if it was truly going to make a difference. Basic characteristics in this segment include – business cash flow, personal debt to income, global cash flow and leverage.  Others may be added but on a case by case basis. What about the score?  If I am doing so much judgmental underwriting, why calculate the score in this segment?  In a nutshell, to act as the risk rating methodology for the portfolio approach. Even with the judgmental approach, we do not want to fall into the trap thinking we are going to be able to adequately monitor this segment in a proactive fashion to justify the risk rating at any point in time after the loan is booked.  We have been focusing on the origination process in this blog series but I need to point out that since we are not going to be doing a significant amount of financial statement monitoring in the small business segment, we need to begin to move away from the 1 – 8 (or 9 or 10 or whatever) risk rating method for the small business segment.  We cannot be granular enough with this rating system nor can we constantly stay on top of what may be changing risk levels related to the individual clients.  But I am going to save the portfolio management area for a future blog. Regardless of the segment, please keep in mind that we need to be able to access the full detail of the information that is being captured during the origination process along with the subsequent payment performance.  As you are capturing the data, keep in mind, the abilities to Access this data for purposes of analysis Connect the data from origination to the payment performance data to effectively validate the scorecard and my underwriting/decisioning strategies Dive into the details to find the root cause of the performance problem or success The topic of decisioning strategies is broad so please let me know if you have any specific topics that you would like addressed or questions that we might be able to post for responses from the industry.

Recently we released a white paper that emphasizes the need for better, more granular indicators of local home-market conditions and borrower home equity, with a very interesting new finding on leading indicators in local-area credit statistics.  Click here to download the white paper Home-equity indicators with new credit data methods for improved mortgage risk analytics Experian white paper, April 2012 In the run-up to the U.S. housing downturn and financial crisis, perhaps the greatest single risk-management shortfall was poorly predicted home prices and borrower home equity. This paper describes new improvements in housing market indicators derived from local-area credit and real-estate information. True housing markets are very local, and until recently, local real-estate data have not been systematically available and interpreted for broad use in modeling and analytics. Local-area credit data, similarly, is relatively new, and its potential for new indicators of housing market conditions is studied here in Experian’s Premier Aggregated Credit Statistics.SM Several examples provide insights into home-equity indicators for improved mortgage models, predictions, strategies, and combined LTV measurement. The paper finds that for existing mortgages evaluated with current combined LTV and borrower credit score, local-area credit statistics are an even stronger add-on default predictor than borrower credit attributes. Click here to download the white paper Authors: John Straka and Chuck Robida, Experian Michael Sklarz, Collateral Analytics  

Our guest blogger this week is Karen Barney of the Identity Theft Resource Center (ITRC). The rise of online functionality and connectivity has in turn given rise to online security issues, which create the need for passwords and other defenses against information theft.  Most people today have multiple online accounts and accompanying passwords to protect those accounts.  I personally have accounts (and passwords) for sites I no longer even remember.  And while I have more accounts than most due to my profession, my hunch is that many people deal with the issue of password overload.  Password overload is when you attempt to use your Pinterest, Twitter, work email and university login passwords (one after another) to get into your Money Market Account only to be locked out.  Now you have to go into the branch with photo ID, or endure the dreaded “customer service hotline” (not-line) to prove that “you are you.”  I expect that you have experienced such “password overload” inconveniences, or you almost certainly know someone who has. The problem seems like it could be easily solved by using the same password for everything.  One password to remember, and no more jumbling through your notebook trying to find what password you used for your newest account creation or Facebook app.  The problem with this approach is that if you are using the same passwords for all (or even several) of your accounts, then if someone manages to get the password for say, your Instagram account, they would probably be able to then drain your savings account, phish your family for personal information (such as your Social Security Number), or rack up a warrant in your name for writing bad checks….  This could all happen because you logged into Facebook at an unsecured Wi-fi location, where your password for that one account is compromised, and it happens to be the same password you use for multiple accounts. So, what do you do if you don’t want to tattoo 25 passwords on your arm and you don’t want to end up cuffed for felony check fraud? The answer is a password manager.  This new service was created so that users can remember just one password, yet have access to all other passwords. The best part is that you can have access to these passwords from anywhere as most of the new password managers are internet based. As the need for password management increases, the options consumers have grown leaving even the strictest cybersecurity aficionado pleased with the service. A few things you should look for when finding a password manager are: Is it cross platform? Will it work on your iPhone and your PC? How is the information (your passwords) encrypted? Does the service sync automatically, or will the user need to update the password storage database every time they sign up for a new account? What is the initial authentication process and how strong is it? How reputable is the company who created the product and what is reported about the product itself? By asking yourself these questions you should be on your way to making sure that your passwords are protected and you won’t lose your mind trying to keep track of them all. Just make sure you protect your login credentials for your password manager…. like really, really well…

The dramatic transformation of the financial services industry requires new advances and innovation in credit strategies to respond to the growing number of underbanked customers who need to be served. The underbanked, or unbanked, market now represents nearly 64 million U.S. consumers who have limited or no traditional credit history. Take a quiz now to test your knowledge of America's underbanked. Source: Experian News, May 2012