General Session V D&B and FICO: Risk Management …...4. Calculate lender-level expected 12 month...
Transcript of General Session V D&B and FICO: Risk Management …...4. Calculate lender-level expected 12 month...
General Session V D&B and FICO: Risk
Management – Now and What’s on the Horizon
Grand Ballroom Salons 1-4 2:15 pm – 3:15 pm
Thank you to our Alliance Partners
• Steve Gregg, Senior Leader, Data & Analytic Solutions Dun & Bradstreet • Adrianna Rockford, Analytical Lead Dun & Bradstreet • David K. Smith, Lead Consultant, Originations FICO • Linda Rusche, Director, Office of Credit Risk Management U.S. Small Business Administration • Paul Kirwin, Supervisory Financial Analyst, Office of Credit
Risk Management U.S. Small Business Administration • Catherine Riddle, Chief Financial and Technology Officer CDC Small Business Finance Corporation
Speakers
D&B FICO Risk Ratings
What is on the Horizon
May 2016
NADCO Spring Summit
Washington D.C.
SMALL BUSINESS RISK PORTFOLIO SOLUTION (SBRPS) SCORE
LENDER RISK RATING/LENDER PURCHASE RATING (LRR/LPR)
SMART LENDER RISK FRAMEWORK
SBA’s Current Risk Rating Tools
3
Small Business Risk Portfolio Solution (SBRPS) Score*
• Built jointly by D&B and FICO, SBRPS predicts the likelihood that a borrower will become severely delinquent (60+ days past due), including bankruptcies and charges offs, within the next 12 to 24 months
• SBRPS uses D&B business credit data (firmographic, financial payment, and public records), as well as TransUnion (TU) consumer credit data (consumer credit bureau report application and internal) and does not rely on the SBA loan performance to assess the borrower’s risk
• For the last 13 years, SBA has successfully used SBRPS to monitor the performance of small businesses and to provide early warnings of future risk
• SBRPS scores are updated and validated, through the data warehouse quarterly processing, as discreet scores on each loan and are available as historical scores for a five year period
* Commonly called by the SBA SBPS
4
Automatic Approve/Reject
Establish Credit Terms
Set Credit Limits
Price For Risk
Risk Mitigation
Monitoring & Benchmarking
Updating Credit Lines
Compliance and Forecasting
Collections Prioritization
Credit Application Evaluation
PortfolioManagement
While Portfolio Management is only one stage of the credit life-
cycle, it could be the most important one, given the suppressed
demand for credit in Financial Services
Sales & Marketing
PreScreen
PreApproval
Small Business Risk Portfolio Solution (SBRPS) Score
5
D&B and FICO combine their respective strengths to put forth the industry-leading
portfolio management blended score
Well-respected
Have high brand recognition
Share a common approach to model development
Dedicated to financial services small business risk assessment
Two Market Leaders That Are…
D&B Adds…
Traditional strength in trade credit origination and financial services
Powerful commercial information
Highly predictive commercial score
Highly experienced batch delivery organization
FICO Adds…
Traditional strength in financial services
Expertise in small business analytics and decisioning
Proficient in building consumer and blended scorecards for small business
Small Business Risk Portfolio Solution (SBRPS) Score
6
Model Definition “Bad” defined as 60+ days delinquent
Predicts performance over 18-24 month period
Suite of 15 Models (Version 6.0)
Model selected based on data available
Model selection logic based on the product type (Term Loan, LOC, Commercial Card), absence/presence of derogatory consumer information, and file thickness (presence of commercial and consumer tradelines)
Unique Features
Score driven by consumer bureau data on up to two principals
Up to four adverse action codes identify top reasons driving down score, plus derogatory commercial public records indicator
Powerful predictive modeling techniques transform data into useful information
Small Business Risk Portfolio Solution (SBRPS) Score
7
SBPS - Blended Data produces most predictive results
SBPS 7.0 Scoring Solution
SBRPS Bureau Based Score
Consumer Bureau
Data
DNB Report Data
SBRI Data
SBRPS Behavioral
Score
Behavioral Data
Business financial
obligation 1
Business financial
obligation 2
Business financial
obligation 3
Behavioral Data:Current and historical information associated with the one financial
obligation being reviewed
8
Our lending customers have been successfully using the SBRPS solution to support a wide range of Portfolio Management efforts
• Early warning risk indicators
• Loan loss forecasting
• Compliance management
• Credit Line management
• Expedited renewals process
Small Business Risk Portfolio Solution (SBRPS) Score
9
Lender Risk Rating / Lender Purchase Rating
• What is the Lender Purchase Rating (LPR)?
• The Lender Purchase Rating (LPR) leverages BASEL III recommendations and industry best practices, and predict each active loan’s 12 month probability of purchase on a quarterly basis
• The models then aggregate the loans’ probability of purchase to a lender-level metric as a measure of overall lender risk and a numeric value - 1 (Low Risk) to 5 (High Risk)
• The loan-level predictive scoring used by the LPR system allows the models to make use of loan attributes such as firmographic and summarized trade data from D&B’s Credit Score Archive Database (CSAD), more granular trade data from D&B’s Detailed Trade Database, the D&B and FICO loan level risk score (SBRPS), macro-economic indicator variables, and SBA’s loan performance data
• Assists in assessing the risk of an SBA Lender’s SBA loan performance on a uniform basis and identifying those SBA Lenders whose portfolio performance demonstrates the need for additional SBA monitoring or other action.
10
Lender risk level assessment done in 5 steps:
1. Predict loan-level probability of purchase across all loans using statistical modeling.
2. Multiply predicted probability of purchase from Step 1 by the outstanding balance (exposure) for each active loan in the lender’s portfolio.
3. Sum up values from Step 2 across all loans in the portfolio to arrive at the total expected purchase dollars for the lender in the next 12 months.
4. Calculate lender-level expected 12 month dollar purchase rate by dividing total expected purchase amount from Step 3 by total outstanding amount in the portfolio.
5. Map lender-level expected purchase rate from Step 4 to (1-5) risk categories.
Lender Risk Rating / Lender Purchase Rating
11
Model Segmentation
1. Current: Account with current payment status
2. Non-Current: Account without current payment status
Model Variables:
Lender Risk Rating / Lender Purchase Rating
Independent Predictors Data Source Short Description Increase (+) or Decrease (-)
Odds of PurchaseGreater # of Accounts D&B sourced – Detailed Trade # of Accounts on Database Last 4
Months
-
Higher % of Accounts Past Due D&B sourced – Detailed Trade Pct of Accounts Past Due -Last 4
Months
+
Higher % accounts 31+ Days Past Due D&B sourced – Detailed Trade Pct of Dollars 31+ Past Due -Last
3 Months
+
Higher SM % Current D&B sourced – CSAD Pct Current - Long Term Trend -
Age in Business D&B sourced – CSAD Average years in Business -
Higher SBPS score D&B and FICO sourced Average Small Business
Predictive Score
-
Increasing Levels of Current Delinquency SBA sourced Average Status - Months
Delinquent, Catch Up, Deferment
+
Months on Book SBA sourced Number of Months On Books -/+/- (U-shaped)
Increases in Housing Prices Macroeconomic data Year Over Year Housing Price
Ratio
-
12
SMART Lender Risk Framework
Objective:
Provide a risk framework for lenders with attribute benchmarks that
• are consistent, accurately measure lender risk, systematic, easy to understand, and on par with industry standards;
• identify the higher risk lenders to assist SBA Office of Credit Risk Management (OCRM) in resource allocation;
• and help lenders identify areas to improve and understand their target ranges and the metrics on which SBA will score their performance.
13
SMART Lender Risk FrameworkThe SMART score is calculated from 12 benchmarks, which are classified into five categories.
• Solvency and Financial Condition, Management and Board Governance, Asset Quality and Servicing, Regulatory Compliance and Technical Issues and Mission.
Each of the 12 benchmarks is assigned a score.
• The sum of all 12 benchmark scores equals the lender’s overall SMART score.
—The score will be periodically updated, with an overall score range of 12 - 60.
14
SMART Lender Risk Framework
• One benchmark scorecard is established for all 504 lenders/CDCs.
• A“20/60/20” rule is used to establish the higher risk (+5), moderate risk (+3), and lower risk (+1) thresholds.
• The “Lower risk” threshold uses the best 20th percentile of 2005 lender performance data.
• 2005 was a period of time when the overall economy was stable and the 504 program was essentially subsidy neutral (net cash yields close to zero) and thus is the preferred state of performance.
• The “Higher Risk” threshold is defined with the worst 20th percentile of current 2013 lender performance data.
• This approach enables SBA to encourage lenders to minimize risky behavior, while still taking into account the residual effects of the economic recession.
15
SMART Lender Risk Framework
5 Year Cumulative Net Yield > -1% ≥ -3% AND ≤ -1% < -3%
12 Month Default Rate 0% > 0% AND ≤ 5% > 5%
5 Year Default Rate 0% > 0% AND ≤ 5% > 5%
Lender Purchase Rating (formerly LRR) 1, 2 3 4, 5
High Risk Origination Rate 0% > 0% AND ≤ 13% > 13%
Loans in Purchase Status Over 3yr Rate 0% > 0% AND ≤ 27% > 27%
Stressed Loan Rate < 3% ≥ 3% AND ≤ 10% > 10%
Recovery Rate (Over last 5 years) > 33% ≤ 33% AND ≥ 6% < 6%
Early Problem Loan Rate 0% > 0% AND ≤ 4% > 4%
( + 5 )
< 4
Average Portfolio SBPS (weighted for $) > 197 ≤ 197 AND ≥ 188 < 188
Top Industry Concentration Rate < 13% ≥ 13% AND ≤ 28% > 28%Technical Issues
Management and Board
Governance
Asset Quality and
Servicing
Regulatory Compliance Minimum Level of 504 Loan Activity
Highest Risk
(+ 5)
Solvency and Financial
Condition
( + 1 )
≥ 4
SMART Category AttributeLower Risk
(+ 1)
Moderate Risk
(+ 3)
SMALL BUSINESS LENDING LANDSCAPE
MACRO-ECONOMIC
REGULATORY
ALTERNATIVE LENDING
DATA, TOOLS & TACTICS
Trends in Risk Rating and Management
in the Industry (not SBA specific)
17
• While payment behaviors have significantly improved over the past few years, lenders are still on the lookout for tools to help refine their risk mitigation, while seeking growth opportunities
• Payment behaviors of all businesses had worsened significantly during the contraction, but are now almost near their pre-recession levels
Source: Federal Reserve Board, Dun & Bradstreet
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
Delinquency (Cycle 3+) Rates on Small Business Credit Card Accounts
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Delinquency Rate on Business Loans
Delinquency Rate on C&I Loans: All Businesses
Cycle 3+ Delinquency Rate on Small Business Loan Accounts
The Current Small Business Lending Landscape: Macro-economy
Trends in Risk Rating and Management in the Industry (not SBA specific)
18
• Changing patterns can be seen among geographies, with respect to both business growth and risk, and lenders need to target appropriately
Small Business Employment Growth by State: 2014-16
Data Source: SBFE Data™ and Dun & BradstreetAnalytic Source: Dun & Bradstreet
Rankings are based on the Feb 2016 D&B SBFE Score which predicts the probability of serious delinquency within the next 12 months on a business financial services account
The Current Small Business Lending Landscape: Macro-economy
Trends in Risk Rating and Management in the Industry (not SBA specific)
19
• Beyond that, which cities and sectors need to be watched?
Industries with the highest risk
• Rankings are based on the Feb 2016 D&B SBFE Score which predicts the probability of serious delinquency within the next 12 months on a business financial services account
MSAs with the highest risk
Rank MetroplitanStatisicalArea
1 LasVegas,NV
2 Laredo,TX
3 Miami,FL
4 Riverside-SanBernadino,CA
5 McAllen-Edinburg-Mission,TX
6 Brownsville-Harlingen,TX
7 FtLauderdale-Hollywood,FL
8 ElPaso,TX
9 Orlando,FL
10 JerseyCity,NJ
The Current Small Business Lending Landscape: Macro-economy
Trends in Risk Rating and Management in the Industry (not SBA specific)
20
• Which macro-economic attributes can add value to your origination and portfolio management models? Regulatory agencies have raised the requirements.
Establishment Openings and
Closings by State
Housing Indicators by
State
Personal Income by State
Retail Sales
Job Losses and Gains by State
S&P 500 IndicesEnergy Prices by
State
Industrial Production
Indices
Loan Delinquency
Rates
The Current Small Business Lending Landscape: Regulatory
Trends in Risk Rating and Management in the Industry (not SBA specific)
21
Portfolio Stress Testing: Scenarios applied to a Risk Score
• The macro-economic factors that significantly affect Risk Scores are Unemployment Rate, and the Dow Jones Industrials Average
• Portfolio Stress Tests manifest how the portfolio will act under various economic scenarios or fluctuations in various economic factors.
• From our experience with stress testing we know that in good economic conditions, with robust Labor and Capital markets, risk scores are expected to climb higher on an average, while inching downwards in periods of slack.
• However, risk scores generally react to macroeconomic changes with some lag.
Scores react to economic
changes with a lag
896.0
900.0
904.0
908.0
912.0
916.0 Scenarios applied to Risk Score
Actual Best Baseline
Adverse Severely Adverse Worst
The Current Small Business Lending Landscape: Regulatory
Trends in Risk Rating and Management in the Industry (not SBA specific)
2222
With the arrival of FinTechs and Alternative
Lenders, the marketplace has changed
Market Place Lenders (MPLs) –
• Relatively new option to traditional bank loans
• Both Personal and Small Business Loans
• Some backed by the SBA
• Alternative to banks – strong use of Alternative data
• Fundation and Kabbage were early pioneers on peer-to-peer lending – back to 2009
• Lending Club and Prosper originally focused on debt consolidation
• OnDeck and Funding Circle emphasized small business lending
• SoFi and CommonBond started in student loan refinancing
• Partnerships have begun – Fundation/Regions, OnDeck/Chase, Lending Club/Citi
The Current Small Business Lending Landscape: Alternative Lending
Trends in Risk Rating and Management in the Industry (not SBA specific)
2323
• Credit quality ranges from subprime to superprime which leads to APRs of ~5.9% - 30%.
• Generally short-term credit – 3-9 months, but some as long as 48 mths
• Some have state lending licenses, others use bank partners
• One common characteristic of MPLs is that they aren't banks —they don't collect deposits and they don't have national lending licenses
• The MPLS don’t yet fall under bank regulatory oversight!
• What is the future?
• More players and other companies like Amex, Amazon, Square, and Paypal getting into merchant lending
Alternative Lenders: Characteristics & Partnerships“Can’t Get a bank Loan –
the Alternatives are Expanding”
The New York TimesJuly 29, 2015
“Banks are Only Hurting Themselves By Shunning
Alternative Lenders”
American BankerAugust 25, 2015
The Current Small Business Lending Landscape: Alternative Lending
Trends in Risk Rating and Management in the Industry (not SBA specific)
24
Organizations usually begin their analytical transformations with one of four high-value initiatives
Grow and Retain and
Satisfy customers
Increase Operational
efficiency
Transform Financial processes
Manage risk, fraud & regulatory
compliance
• Identify/Grow best prospects• Reduce Attrition• Personalization/relevancy• Drive profitable growth
• Optimize Expenses• Automate decisioning• Personalization/relevancy
• Increase Cash Flow - Net Profit• Customer Lifetime Value • Strategic Drivers• Staying ahead of competition
• Risk/Fraud mitigation• Premium assignment strategies• Regulatory due-diligence• Vendor Risk mitigation
Data, Tools, and Tactics
Trends in Risk Rating and Management in the Industry (not SBA specific)
25
• Optimized decision making is driven through analytics
Analytics Infused Data
Standard Scores and Predictors
Advanced Analytics Services
• Custom models and scorecards
• Joint Strategic Engagements
• Analytics Sandbox for R&D
• Composite Risk Score• D&B Viability Rating• D&B Delinquency Score• D&B Total Loss
Predictor • Global Business
Ranking• Material Change™ • Decision HQ
• Detailed Trade• Inquiry Data• Global Activity Data• Small Business Financial
Exchange (SBFE®)• Small Business Risk Insight
Data, Tools, and Tactics
Trends in Risk Rating and Management in the Industry (not SBA specific)
26
Financial Institutions have begun to utilize innovative data assets which provide significant lift, giving tremendous new insights into business behavior
UNIQUE, PROPRIETARY ANALYTIC INFUSED DATA
DETAILED
TRADE
PAYMENT
DATA
LABOR
MARKET/
JOB
POSTINGS
MACRO
ECONOMIC
DATA
INQUIRY &
MATCH
DATA
BUSINESS
ACTIVITY
DATA &
SIGNALS
PURCHASE
AND
SPEND
DATA
Data, Tools, and Tactics
Trends in Risk Rating and Management in the Industry (not SBA specific)
27
Lenders can improve the bottom line with innovative commercial insights and analytics
across the customer lifecycle
Business
Impact
Work Flows
Analytical
Capabilities
Origination &
Underwriting
Account Mgmt
& Portfolio MonitoringCollections & Recovery
Standard &
Custom Models
Standard &
Custom Models
Custom
Collections
Model
Maximize New Applicant
Profitability or Approval
Rates
Risk Mitigation &
Profit Optimization
Maximize $$
Collected &
Efficiency
Line Assignment Decision,
Segmentation Strategies
Recovery Analytics,
Segmentation Strategies
Score Cutoff &
Approval Rate AnalysisEarly
Warning
Third Party Outsourcing
Analytics
Activation and Balance
Build, Segmentation
Strategies
Most Profitable
Prospecting &
Targeting
Standard & Custom
Models
Maximize net approval
rates, Find “fresh/hot”
prospects
Acquisition
Risk knockout ,
Profitability Models,
Segmentation
Data, Tools, and Tactics
Trends in Risk Rating and Management in the Industry (not SBA specific)
3:30 PM – 5:00 PM • General Session VI – Briefing from the Office of
Credit Risk Management Grand Ballroom Salons 1-4 5:30 PM – 7:00 PM • PAC Reception Sonoma Restaurant & Wine Bar In Honor of: Congresswoman Judy Chu (CA-27) Ranking Member House Small Business Subcommittee on Economic Growth, Tax and Capital Access
What’s Up Next?