Feature
Expansive samples help better
predict bankruptcy risks and
improve long-term performance
throughout the entire consumer
lifecycle, identifying red flags that
are specific to a lender's business objectives. Decisioning and
predictability provides an early
warning for lenders as to what's
happening with certain consumers. Lenders are able to make
strategies on how to move forward with consumers who have a
high bankruptcy risk by leveraging decisioning that accurately
distinguishes high-risk accounts.
Consistent
Treatment and
Decisions
B
ankruptcies are hard for
lenders to recover from. The
processes of retrieving information on a specific consumer and
obtaining bankruptcy payments are
obstacles. Using a bankruptcy score
that is consistent across all three
credit bureaus is crucial in making
key decisions. Creditors may have
bankruptcy scores from all three
bureaus but they will not reflect
the same risk. By using scores that
are consistent across the bureaus,
lenders will receive a consistent
decision regarding a consumer's
potential risk for bankruptcy.
The Consumer Financial
Protection Bureau (CFPB) wants
to see lenders' utilization of consistent decisioning for consumers.
The CFPB pays close attention to
creditors and what they're doing
regarding policies and decisioning. Lenders' treatment of customers must be consistent—like
their loan decisions.
A Look into
Consumers' Past
F
inancial tendencies are better
understood in patterns. Utilizing a bankruptcy model that
leverages historical data to predict
the likelihood a consumer will
file for bankruptcy enables lenders to identify and mitigate risk
across a consumer's lifecycle.
22 |
The M Report
A performance definition
within a bankruptcy risk model
reveals if a trade is bad or good. If
a Chapter 7 or 13 bankruptcy has
occurred on an individual's file
during the 24-month performance
window, the trade is considered
bad. Spotting bankruptcy earlier,
and avoiding it, helps lenders
make timely decisions by leveraging market-leading consumer
A consumer's lifecycle will
reveal data that is crucial in distinguishing profitable consumers
and protecting portfolio profitability. Bankruptcy risk scores
can also support underwriting
of HELOCs since the information provided will help lenders
decide to approve or decline a
consumer based on potential for
bankruptcy within two years.
Identifying various
borrower propensities for
bankruptcies and their
delinquencies will enable
servicers to make better
decisions and investors to
protect portfolio stability.
credit data and analytics. Utilizing
models that have been upgraded
over time will provide lift performances and better recognize
high-risk customers.
Looking at the entire consumer
lifecycle to identify, and hopefully,
reduce bankruptcy risk enables
lenders, investors, and servicers to
target certain characteristics and
make more consistent decisions
across the lifecycle, such as:
••Account Acquisition—To approve, deny, or set initial limits
with consumers in a home
equity line of credit (HELOC),
for example;
••Portfolio Management—To
review portfolios, determine
segmentation, and apply treatment strategies earlier in the
process to help mitigate losses
before they occur; and
••Collections—To prioritize accounts and determine aggression level in collection actions.
Consumer
Delinquency Risk
A
s the economy continues to
recover and banks open up
more opportunities to consumers, it is imperative that servicers and investors are monitoring those consumers who
are delinquent, or may become
delinquent. Identifying various
borrower propensities for bankruptcies and their delinquencies
will enable servicers to make
better decisions and investors to
protect portfolio stability.
According to Equifax National
Consumer Trends data, as
of October 2013, the 30-day
delinquency rate for total home
finances, which includes first
mortgages and HELOCs, is 5.45
percent, and total home finance
write-off dollars year-to-date
in October 2013 is $96.3 billion.
Although this is a six-year low
for year-to-date in October 2013
and a 22 percent decrease from
year-to-date in October 2012,
consumer mortgage delinquencies
have the probability to advance
into consumer bankruptcies.
Although transitions to
deeper stages of delinquency are
slowing, servicers and investors
will need to be cognizant
of mortgage delinquencies
within a consumer's lifecycle.
According to the same data,
mortgages originated from 2005
to 2007 comprised 64 percent
of severely delinquent balances,
with mortgages since 2009
comprising just 21.8 percent of
severely delinquent balances.
However, lenders are still
encouraging borrowers to sign
up for payment plans so that
they do not become delinquent,
thus decreasing the chances of
bankruptcy.
Eliminate Bankruptcy
Surprises
L
enders, servicers, and
investors need to protect
themselves from the surprise,
immediate, or long-term effects
of consumer bankruptcy. Deep
and predictive 24-month consumer insight data and analytics
provide lenders with the ability
to predict bankruptcies and
make more consistent decisions.
Leveraging tri-bureau enabled
models distinguishes profitable
consumers from at-risk consumers, enabling lenders to advance
or curtail borrower opportunities
or investors to predict portfolio
profitability.
The consumer lifecycle is a
complex entity, which must be
matched by comprehensive data
in order to improve bankruptcy
prediction and increase decisioning stability. Investors can better
protect portfolios and lenders
can have a more positive loan
acquisition experience when risk
is reduced and profitable services
are better understood. Achieving
consistent decisioning and leveraging predictability can identify,
predict, and prevent consumer
bankruptcy.
