Credit Boot Camp:
Origination Best Practices
Mary Du Pont
Fair Isaac Advisors
FICO
© 2014 Fair Isaac Corporation. Confidential.
This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
Agenda
►Definitions
and Types of Credit
►Definitions
and Types of Risk
►Originations
Process
►Originations
Decisions
►Originations
Scores
►Making
►Last
2
Decisions Actionable
Words: Originate with Care
© 2014 Fair Isaac Corporation. Confidential.
Decision Integration Is a Key Concern
Data
Data
External
Data
Internal
Data
Precision
Marketing
Customer
Origination
Customer
Management
Location & geographic
footprint
Target prospect/
customer?
Manage marketing
campaigns?
Tailor offer/message/
incentive?
Tier pricing?
Manage promotional
expense and effect?
Timing/ frequency of
campaigns?
Accept/reject?
Deter fraud?
Verify customer ID?
Anti-money laundering?
Affordability/suitability?
Tier pricing?
Initial line?
Loan-to-value?
Collateral value?
Cross-sell?
Upsell/downsell/offer
alternative?
Promote usage?
Obtain payments?
Manage exposure?
Collateral tracking?
Mitigate risk?
Deter fraud?
Marketing
communications?
Adjust pricing?
Service level?
Cross-sell?
Stress testing?
Reactions
© 2014 Fair Isaac Corporation. Confidential.
Obtain payments?
Allocate resource?
Channel & contact
strategy?
Treatment strategy?
Debt placement?
Debt sale?
Agency strategy?
Collector skills?
Legal/insolvent/ repo
accounts?
Workflow? Incentives?
Actions
Client Prospects
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Customer
Collections
Client Customers
Achieve Growth Objectives
Within Stated Risk Appetite
► Risk
appetite is an expression of the
level of risk an organization can
adequately manage before steps are
taken to reduce risk or improve
capabilities
► Holistic
► Will
view of the organization
constrain growth opportunities
► Is
critical input to the originations
decision model
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© 2014 Fair Isaac Corporation. Confidential.
Risk
Appetite
Growth
Objectives
Profitability Is Driven by Risk Appetite
► Inherent
borrower risk—the lender selects
the risk level comfortable to their corporate
goals and capabilities
► Then
Risk Happens
► Change
in economic circumstance
► Change in competitive structure
► Regulatory and legislative events
► Operational issues/risks/fraud
► Natural and Unnatural disasters
► Funding and pricing risks
► Technology risk
► Credit
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loss can dominate other profit factors
© 2014 Fair Isaac Corporation. Confidential.
Originations: Four Factors to Consider
Borrower Risk
► Inherent
ability/willingness of customer to pay
► Credit history and capacity to pay
Deal Risk
► Suitability
► Product
feature which influence willingness or ability
Collateral Risk
► Value
and disposability of asset in the future
Funding Risk
► Rising
costs of capital, scarcity of capital, securitization
and debt sale options
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© 2014 Fair Isaac Corporation. Confidential.
Define Each Risk Type
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Risk Type Assessment
Credit Lending Policy
Credit History
Capacity to Pay
Collateral
Product/Term
Customer
Override
Adjust as needed
© 2014 Fair Isaac Corporation. Confidential.
Risk Management Team
► Confirm or deny concentration issues exist and
modify originations as needed to balance portfolio
► Adjust decision to maintain conformance to risk
appetite
► Assure overrides within tolerances and performing
as expected
Type of Credit Influences Originations Strategy
Unsecured Revolving Credit
► Yes/no/maybe
decision
► Ability to repay based using the
entire line
► “Maybe” involves counter-offer to
other product type
Finance Company Model
► Risk-Based
Pricing or
► Find the terms and conditions at
which the deal can still be profitable
given the risk of the borrower
► Affordability is key concern
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© 2014 Fair Isaac Corporation. Confidential.
Asset Backed Lending
► Assumes
real assets that can be
taken at default
► Collateral valuation becomes critical
Relationship Lending
► Considers
the entire view of
customer value
► Relationships with the institution
Indirect Lending
► Credit
is offered through a network
of dealers/distributors
► Less application process control
Sample Originations Process Flow
Analyst Review
Application
Validate
Application
Data
Validate
Min Policy
Requirements
Retrieve/
Evaluate
Bureau
Score
Application
Final Decision Making
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© 2014 Fair Isaac Corporation. Confidential.
Offer
Products
Perform
App
Approval
Processing
Originations Decision Structure
Rule Implementation Flow
High Level Overview
►
Application Quality—Designed to establish that
the data is complete and accurate
►
Hard declines exist to prevent applications from
extensive review, data purchase or other expense
when conditions exist which prevent approval
under any circumstances
►
Segmentation exists generally to direct the
application to the proper decision stream
►
Decision Criteria is the application of the data to
the decision criterion
►
Decision is the resulting data from the Decision
Rule
►
Treatment is the set of actions that are taken or
are logged against the application
Application Quality Rules
Stable
Hard Declines
Segmentation Rules
Continuous
Analysis
Decision
Criteria
Decision
Treatment
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© 2014 Fair Isaac Corporation. Confidential.
Data Entry and Information Capture Has Impact
Across Originations Process and Beyond
Regulatory Considerations
► Data
quality is a key consideration under
Basel II
Is needed to verify ID (“Know Your Customer”)
► Anti Money Laundering (AML)
► Legally required to obtain data and open an
account
►
Risk Considerations
► Data
quality is a key to accurate decisions
►
Improves the accuracy of a credit report match
► Would invalidate the statistical correctness of
the score
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© 2014 Fair Isaac Corporation. Confidential.
Process Considerations
► Customer
response
► Validity/interpretation of source/situation
► Needed in downstream decisions
Application
Quality Rules
Hard Declines
Scores and Policy Rules to Reduce Potential for Loss
Application Policy Declines
► Outside
geographic region
► Under minimum age
► Income requirements
► Product requested
Policy and Score Declines
► Level
of risk present
► Cumulative exposure limits
► Condition of existing accounts
► Internal and Eternal Negative file
Credit Bureau Declines
► Bankruptcy/Insolvency
► Liens
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or judgments
© 2014 Fair Isaac Corporation. Confidential.
Credit Screening
Segmentation Scheme
Subsets of the Policy which Will Receive Different Decision Criteria
Regulatory Considerations
► Transparency
► Rationale:
Use empirical methods to define
segments and prove they are
homogeneous and actionable
►
Tracking Considerations
► Will
there be sufficient volume by segment?
► Are comparisons valid across segments?
► Is there alignment across the life cycle?
Demonstrability
► Protected
classes
Product Considerations
► Will
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the segments apply to all products?
© 2014 Fair Isaac Corporation. Confidential.
Segmentation
Scheme
Decision Criteria
Subsets of the Policy which Will Receive Different Decision Criteria
Regulatory Considerations
► Scores-validated
scores!
► Fair Lending and Affordability
► Use of empirical methods to define criteria
and prove they are predictive and
actionable
Risk Assessment Considerations
► Do
I have an evaluation of each risk type?
► Does customer pass each risk standard?
Data Considerations
► How
is missing data handled?
► What is predictive in addition to scores
► How is capacity defined?
► How is collateral value determine?
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© 2014 Fair Isaac Corporation. Confidential.
Decision
Criteria
Decision
The Resulting Data from the Decision Rule Review Processed Against Decision Criteria
Regulatory Considerations
► Fair
Lending and Affordability
► Appropriate product
Product Considerations
Feature and Term Considerations
► Will
the term or features increase or
decrease risk?
► Will the down payment change the risk
► Will the price cause adverse selection
► Approve
or decline the product requested
or down sell
► Is additional information needed- referral?
► Is this a conditional approval?
► What amount fits capacity to pay?
► Is there capacity to consider upsell?
Decision
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© 2014 Fair Isaac Corporation. Confidential.
Treatment
The Set of Actions that Are Taken Or Are Logged Against the Application
Regulatory Considerations
► Disclosures
► Adverse Action
Profile Considerations
► What
are communications preferences?
► Increase customer engagement and
influence usage
Product Considerations
► Consider
the entire set of treatments
► Consider previous treatments
► Consider customer value
► Consider what actions you want next
Treat
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© 2014 Fair Isaac Corporation. Confidential.
Origination Scores
Usage
Tells You
Based On
Decisions
Supported
Type Of Model/
Score
Delivery
Systems Used
Within
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Risk of new accounts
Likelihood that a new account will default within a short time after the
account booking (usually 12 to 18 months)
Customer and credit bureau data
Approval/decline, initial credit line, terms and conditions,
pricing/APR
Risk model built from analysis of a credit grantor’s own booked
population, or from analysis of data contributed by a closed user group
Models embedded within origination system(s) installed at the lender or
delivered via ASP or processor platforms
FICO® Origination Manager; FICO® LiquidCredit® Service
other popular origination and new account systems
© 2014 Fair Isaac Corporation. Confidential.
Overrides
Judgmental Overrides
► Reversal
of decision indicated by decision
► Informational: based on information not contained in scorecard or rules
► Intuitional: based on “gut feel”
►
Watch override categories like “miscellaneous” and “all other”
Lowside Override
► Decline
an applicant who otherwise passes criteria
Highside Override
► Decline
an applicant who otherwise passes criteria
Rationale
► This
is not data correction, this is an account meeting risk tolerance despite failing criteria
► Performance tracking must confirm this
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© 2014 Fair Isaac Corporation. Confidential.
Initial Credit Assignment Is usually a Function
of Risk, Income and Potential Exposure
Unsecured Revolving Lines: Credit Line
► Competitive
Considerations—creating wallet share
► No fall-back collateral
► Function of risk (single or multiple scores) and income
► Affordability an increasing concern
► Customer exposure a consideration
Secured Credit: Loan to Value (LTV) Ratio
► Competitive
Considerations—getting bookings
► Collateral Valuation is key
► Function of risk and cushion desired between loan amount and
likely amount for which repossessed collateral could be sold at auction
► Other terms and conditions may also be adjusted
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© 2014 Fair Isaac Corporation. Confidential.
Multi-Product and Counter-Offer Strategies
Make Sense for Full-Service Creditors
►
Current Account/
Checking
Counter-offer if customer could qualify for a
product other than the one requested
►
Overdraft Protection
►
Debit Card
►
Customer
Credit Card
Vehicle Loan
Education Loan
Mortgage/HELOC
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© 2014 Fair Isaac Corporation. Confidential.
►
Up-sell: better product
Down-sell: lesser product or product with
more restrictive terms
Consider loan purpose and customer
expectations
Counter-offer typically communicated in
place of decline, but with same
communication requirements
► Where multi-product lending is possible,
may make sense to establish customer
exposure and offer additional products
beyond the one for which customer
immediately applied
Communicating Declines, Anticipating
Re-Evaluation Requests
► Specific
requirements may dictate the timing and manner
of communicating declines
► US—score
reasons and credit report provider info must be
communicated
► Product
type may also influence how declines are
communicated
► Letters
for national bankcard issuers
► Face to face for branch
► Over the phone to a dealer rep
► Applicants
may have right to ask for re-evaluation if
correct deficiency (missing info) or believe info to be
wrong
► Declines
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must stay on file for a reasonable period
© 2014 Fair Isaac Corporation. Confidential.
General Challenge to Create Competitive Advantage
Magnified in Crunches
Keep your product offerings competitive
Adverse Selection: High risk applicants will
respond to any product opportunity, while low
risk applicants can discriminate between various
credit opportunities
► High
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response rate is not always good news
© 2014 Fair Isaac Corporation. Confidential.
Your Acceptance Does Not Guarantee Booking
► An
applicant may meet all of your lending criteria and
warrant an offer of credit
► In
situations of indirect lending, application likely to
have been sent to multiple creditors for consideration
► Auto
Dealer objectives, customer risk may both impact
selection of which offer to accept
► If
acceptance rate and booked rate vary significantly,
important to check
► How
your terms and conditions fare against competitors
► How your competitors may be compensating, incenting
dealers
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© 2014 Fair Isaac Corporation. Confidential.
Competition, Technology, Channel Proliferation
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© 2014 Fair Isaac Corporation. Confidential.
Don’t Forget Fraud!
Fraud Deterrence
► Companies,
markets not targeting fraud become the
targets of fraud
► Scores
trigger investigation of high fraud potential
applications
► Identity theft trends driving increased use of third-party
information for verification of demographics, income and
employment facts
► Fraud detection and deterrence a key component in
originations
► ID verification an increasingly important element of
“Know Your Customer” directives, AML policy
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© 2014 Fair Isaac Corporation. Confidential.
Connected Decisions
Setting up the Booked Account
► Important
Distribution
Customer
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© 2014 Fair Isaac Corporation. Confidential.
to transfer information to the
billing system master file that will:
► Enable customer contact
► Permit ID verification
► Satisfy legal requirements
► Enable score and policy tracking
► Permit performance capture to tie
back to originations criteria
Holistic View of Originations Risk Management
► Parts
of an organization are defined by the
processes that are executed and influenced by:
► Oversight
Environment
► Governance
► Policy
and Procedure
► Audit
Oversight
► Environment
► Resources
► Technology
► Culture
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© 2014 Fair Isaac Corporation. Confidential.
Process
Thank You!
Mary Du Pont
marydupont@fico.com
Phone
© 2014 Fair Isaac Corporation. Confidential.
This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation’s express consent.
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© 2014 Fair Isaac Corporation. Confidential.
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Mary Du Pont
marydupont@fico.com
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© 2014 Fair Isaac Corporation. Confidential.