The New Lending System - Putting common sense into compliance and risk assessment

Sunday, October 4. 2009

Questions on Lender's Minds

As lenders asssess lending opportunities and risks in today's troubled economy, they must consider many factors, and unavoidably all sorts of questions pop into their minds. For example:

Item: Congress is poised to enact new laws and regulations in the wake of the financial crisis and the banking industry is experiencing a great deal of FUD anticipating the outcome.

Item: Banks are struggling to properly assess credit risk so that they can make profitable loans – the demand is there, but they are hesitant to lend.

Item: It’s now the end of another quarter and lenders are looking at one or more of their product lines and finding that they've come up short in terms of revenue, and have mounting losses. “What happened?”

Clearly, the FICO score is too blunt and and too opaque a method with which to manage credit nowadays. With CCAF you can find the answers and take immediate and appropriate action.

Take, for example, the question “How should we tighten (loosen) credit?” which I highlighted in red in the above figure. Let's contrast the curent "state-of-the-art" with the CCAF approach for addressing this question, which is both a natural, and a recurrent, one in the world of lending operations.

As economic cycles progress and market forces play out, lenders must respond by altering their lending policies.

Fact: Today, adjustments made to a multitude of conditions on factors
Fact: Moreover, rules differ by loan sub-product, program, geography, channel, …

This poses 2 major problems, namely:

Problem #1: The current process of restricting credit access, referred to as tightening, is complicated (lots of levers to pull), time consuming, imprecise, and tends to over-correct, which results in the loss of profitable business

Problem #2: Conversely, the process of giving greater access to credit, referred to as loosening, is also complicated, time consuming, imprecise and tends to under-estimate the riskiness of certain segments of borrowers, which results in higher delinquencies and losses

How does CCAF deal with this situation? Ans: Simply by Moving the CCAF Holistic Score Cut-Off !

With the CCAF Score, CCO’s can tighten or loosen credit with a single number, instead of the current practice, which is time consuming, complicated and sub-optimal.

Note: At any point in time, business rules may be added, modified, or deleted at the handle (individual borrowing segment) level to avoid the current practice of over/under correcting when tightening and loosening credit.

Posted by Clark Abrahams in Financial Crisis at 17:10 | Comments (0) | Trackbacks (0)

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About Clark Abrahams

Clark Abrahams is Chief Financial Architect at SAS where he leads business and product development. He has over 30 years of experience in the financial services industry. Along with co-author Mingyuan Zhang, Clark has written two books that re-think credit risk management and granting access to credit:

Fair Lending Compliance: Intelligence and Implications for Credit Risk Management