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Credit risk webinar with Mark Zandi available on demand

On May 22, 2013, American Banker conducted a webinar sponsored by VantageScore Solutions focused on “New Credit Risk Realities & Opportunities.” Hosted by Kurt Laughlin, American Banker’s editor-at-large, the webinar featured presentations from Moody’s Analytics Chief Economist Mark Zandi and Sarah Davies, senior vice president of analytics, product management & research, with VantageScore Solutions.

The webinar emphasized how global economic trends and consumer-credit trends in the United States underscore the need for post-recession analytic approaches.

Zandi emphasized that while there are encouraging signs, the pace of the recession recovery is “subpar” when compared with the economic conditions after previous recessions. The unemployment rate and deep severity of the recession are contributing to the tepid recovery, but bright spots include corporate profits and the easing of credit standards in some key areas.

Zandi said that auto originations for subprime borrowers are increasing, and for the first time in his career, “the credit risk guys [in the credit card industry] are telling the marketing guys to make more loans.”

Unlike the auto and credit card markets, the mortgage industry continues to struggle, according to Zandi. He stressed regulatory uncertainty related to qualified residential mortgage (QRM) rules as one of the reasons the private label mortgage-backed securities (MBS) market remains stagnant.

“I really don’t think the credit spigot opens fully until we get the private label MBS market operating again,” Zandi said. “That is only going to happen if we nail down the QRM risk retention rule.”

The good news, Zandi said, is that quality data has never been more readily available and transparent, which allows modelers to develop better techniques for analyzing risk.

The second half of the webinar was dedicated to the VantageScore 3.0 model, the first credit scoring model developed using post-recession data.

“The changed post-recessionary environment inspired VantageScore 3.0,” said Davies.

Davies walked webinar participants through the new model and covered aspects including:

  • Predictive performance and how the model achieves up to 35 percent predictive improvement over the earlier VantageScore 2.0 model
  • Drivers of this improved predictiveness, including usage of more granular data platform
  • How the model’s unique consistency across all three credit reporting companies gives lenders added confidence that risk exposure related to model design is eliminated
  • How the model is able to provide scores for 30 to 35 million more consumers, which expands a lender’s universe even among Prime and Near-Prime populations.

Both Zandi and Davies also discussed the student loan market, which has grown into the second largest credit market behind the mortgage market.

“This is a problem waiting to happen,” said Zandi. “We’re not careful about who is getting the student loan. A lot of the lending that goes through the government isn’t credit-based. The private loan market is OK, but a lot of the $1 trillion in student debt—$800 billion—is government-subsidized.”

Davies emphasized how the more granular data used to develop VantageScore 3.0 is able to assist risk managers in accounting for this trend.

“We’re now looking at student loans individually and uniquely in terms of whether they are deferred or in active payment status,” Davies said. “So we’re running the gamut of where a student might be in the status of that loan as well as looking at government and private loans.”

The webinar concluded with Davies’s discussion of how the VantageScore 3.0 model also takes consumer friendliness in credit scoring to new heights, with special treatment for victims of natural disasters, consumer education concerning reason codes, and other new developments.

Visit American Banker to see a playback of the full webinar on demand.

Survey shows widespread misunderstanding of credit scores and student loans

Consumer Federation of America (CFA), in partnership with VantageScore Solutions, announced the results of a third-annual survey that measured consumer knowledge of credit scoring at a media-only teleconference on May 13. CFA is a nonprofit association of nearly 300 consumer groups founded in 1968 to advance consumer interests through research, advocacy, and education.

The 18-question survey was administered by Opinion Research Corp. (ORC) to more than 1,000 representative American consumers. The survey follows two similar studies that VantageScore Solutions and CFA commissioned from ORC in 2011 and 2012.

The results show large percentages of consumers incorrectly answered wide-ranging questions about credit scores and their impact. For example, many survey respondents do not know that credit card issuers (38 percent) and mortgage lenders (40 percent) use credit scores in decisions about credit availability and pricing. Two-fifths incorrectly believe that personal characteristics such as age (43 percent) and marital status (40 percent) are used in calculating credit scores.

This year’s survey also included a question related to co-signing for a student loan. The survey found between one-third and two-fifths do not know that the credit scores of student loan co-signers are affected by that loan—improving if payments are made on time (38 percent) and declining with one late payment (31 percent).

 “The student loan market has grown enormously over the past few years. Student loans are now the second largest asset class in the credit industry, trailing only the mortgage industry,” said Barrett Burns, president and CEO of VantageScore Solutions. “Unfortunately, student loan defaults are also increasing. We need targeted education to ensure both graduating students and co-signers of their loans fully understand their obligations and the repercussions of missed payments.”

As part of their educational partnership, VantageScore Solutions and CFA launched www.creditscorequiz.org, a consumer-focused website that mimics the survey. It lets consumers test their credit scoring knowledge, and provides correct answers for each question as they progress through the quiz. The website is completely free and neither displays any advertising nor collects any personal data. Useful resources and real-time nationwide results are provided. Both the online quiz and a companion brochure are also available in Spanish at www.creditscorequiz.org/Espanol.

“We are once again pleased to partner with VantageScore Solutions in order to better educate consumers about credit scores,” said Stephen Brobeck, Executive Director of CFA. “We encourage all consumers to take the credit score quiz and learn how to become better managers of credit.”

The full results of the survey are available on CFA’s website. News articles generated as a result of the survey announcement include:

Funny Money: Hobo or Boy Scout? Credit quiz tells the score
Chicago Tribune
20 May 2013 

What’s in a Credit Score? Few Know.
Bloomberg News/BusinessWeek.com
16 May 2013

What you don’t know about your credit score can hurt you
NBCNews.com
15 May 2013 

Nuances of Credit Scoring Still Elude Consumers
NYTimes.com Bucks Blog
14 May 2013

Five Credit Score Misconceptions That Can Cost You
Forbes.com
13 May 2013

Study Shows Widespread Ignorance on Credit Scores
American Banker
14 May 2013

Student loans and credit reporting

By John Ulzheimer

It’s no secret that, on average, consumers with college degrees earn more over their working lifetimes than those without. And, if you’re able to get in to a college or university, the chances are you’ll be able to finance it—and you won’t be alone. There is currently over $1 trillion in outstanding student loan debt in the U.S. To put that figure into perspective, there is about $160 billion more in student loan debt than there is in credit card debt.

For those of you who have taken out student loans to finance your education, there are a few credit reporting factoids with which you should become familiar:

  • First and foremost, student loan debt is reported to the three national consumer credit reporting companies (CRCs): Equifax, Experian and TransUnion.
  • A student loan is a type of installment loan, which means it has a fixed payment for a fixed period of time, like a mortgage or an auto loan.
  • And, like a mortgage, in many cases the interest you pay on student loan debt is tax deductible.

When it comes to credit reporting, student loans are normally reported on a disbursement basis. That means if you take four separate disbursements, one per school year for example, then you’ll have four separate student loans on your credit reports. And finally, even if your student loan is in deferment and no payment is currently due, the loan is still likely to be reported to the credit reporting companies.

Student loans and credit scoring

Student loans are seen and evaluated by credit scoring models just like any other debts that are reported to the CRCs. That means if you are managing your student loan debt properly by making payments each month, your credit scores will benefit. Conversely, if you are missing student loan payments or defaulting on your student loans, your credit scores will likely be poor.

When it comes to student loan debts, you’d be surprised how little negative impact they have on your credit scores as long as they are being paid on time. Generally speaking, installment debt is less predictive of elevated credit risk than other loan types and, as such, even large amounts tend to be much less problematic for your credit scores than, say, large amounts of unsecured credit card debt. The point being, $10,000 of maxed-out credit card debt is going to be much more damaging to your credit scores than $10,000 of properly managed student-loan debt.

To accelerate payback, or not

We all want to be debt-free, with no financial liabilities or monthly obligations. But, there is certainly good debt and bad debt when it comes to credit scoring and wealth building. Student loans fall in the category of “good debt,” primarily because their impact to your credit scores is minimal and the interest is tax deductible.

Compared to student loan debt, or almost any other debt, credit card debt could be considered “bad debt.” Interest paid on credit card debt is not tax deductible and even modest amounts can wreak havoc on your credit scores if your balances get too close to your credit limits.

If you are fortunate enough to find yourself in a position to make larger lump sum payments to your creditors, then it’s almost always a smarter financial move to pay off or pay down your credit card debt. Not only will your credit score benefit, but you will also save a considerable amount of money in interest that you will no longer be paying to your credit card issuers. The average interest rate on a credit card is around 15%, which is considerably higher than the average interest rate on student loan debt.

Index of Banking Activity dips amid lower loan pricing

The Index of Banking Activity declined to 57.5 in April, from 60.1 in March, as competition for borrowers put downward pressure on loan prices. The March reading was the highest ever for the composite index, which American Banker began compiling last July in partnership with VantageScore Solutions.

The composite index, which combines 16 separate measures, including pricing on commercial and consumer loans, continues to show ongoing industry expansion, but at a rate somewhat slower than a month ago. April’s component reading on commercial pricing fell nearly two full points, to 35.8 from 37.7 in March.

Source: American Banker and VantageScore Solutions, LLC

Compiled from surveys of executives at hundreds of financial institutions across the United States, the index is an industry bellwether that tracks 16 distinct business indicators, such as volume of deposits, loan applications, and loan delinquencies, and how they change month over month. Measurements of each of these components are combined into a single Composite Index, in which readings above 50 indicate business expansion, and those below 50 signify contraction. Find more information about the Index and its component measurements at AmericanBanker.com.

Did You Know:
Well-handled accounts matter more than the ‘right’ number

One of the most common questions consumers ask is about the number of accounts that should be kept on credit reports in order to earn great credit scores. While the attention paid to the “quantity” is to be expected, thankfully it is largely unnecessary. Credit scores tend to focus on your credit-management, methods—your “quality,” rather than your quantity.

Still, according to our research, consumers who have “prime” credit scores have an average of 13 loans on their credit reports. And the oldest loan is more than 15 years old.

That doesn’t mean you can boost your credit score by running out and adding loans until you have a baker’s dozen in your credit file. That tally does not necessarily mean 13 active loans with balances. It can, and normally does, mean 13 loans accumulated over many years of time, most of which are long since paid off.

Credit reporting agencies will maintain even paid-off and inactive loans for up to 10 years, which means you can easily accumulate what appears to be a large number of credit obligations. Still, what is most important is not how many credit obligations you have, but how well you are managing those obligations.

For example, someone with one or two loans that are heavily leveraged or in default is considerably riskier than someone with 13 well-managed accounts. The proof will be in their wildly divergent credit scores. And if you choose to live a lighter credit lifestyle, you too can earn tremendous credit scores, as long as you are making payments on time and maintaining respectable amounts of debt on your credit card accounts.

Five Questions with Steve Brobeck, Executive Director, Consumer Federation of America

For the third consecutive year, VantageScore Solutions and Consumer Federation of America (CFA) have partnered to better understand how much consumers understand about credit scoring and to develop resources to bridge the knowledge gap.

Since 1980, Steve Brobeck has served as executive director of CFA. The Score caught up with him to discuss this year’s knowledge survey and his thoughts on consumer advocacy.

What were the most concerning and most encouraging survey results from this year?

Most Americans appear to have at least a fair understanding of credit scores. Most encouraging is that almost everyone knows that not making on-time loan payments adversely affects their scores.

Many Americans don’t know what scores are—a measure of credit risk—and on what they are based—principally one’s credit and payment history. Many are not aware how broadly credit scores are used, not just by creditors, but also by utilities, cell phone companies, landlords, and other service providers. And many do not know how costly low scores can be—thousands of dollars of additional interest charges on a car loan, and tens of thousands of additional charges on a mortgage loan.

What demographic trends did the results of this year’s survey uncover?

Predictably, Americans with more education and those who have recently accessed their credit scores know more than those who have not. But somewhat surprisingly, on many questions women know more than men. This may be related to the fact that other research shows that women are more likely than men to manage family finances.

How has the existence of the CFPB impacted consumers and their usage of financial services?

The CFPB ensures that there is a federal agency with primary responsibility for looking at consumer participation and protection in the financial services marketplace. Just their careful monitoring of this marketplace, through research and a complaint database, will help ensure fairer provider practices. But they also have the ability to target the irresponsible minority of companies that threaten the reputation and market share of the responsible majority.

What are CFA’s concerns with respect to the student loan market?

The accumulation by many students of tens of thousands of dollars of student debt may severely limit their future opportunities—the jobs they can afford to take and their ability to begin building the wealth needed to ensure long-term financial stability. This is a complex issue aggravated by rising college expenses, irresponsible marketing of debt by some institutions, likely increases in loan costs, and unwise decisions by some students and their parents about what schools to attend and whether students should work while they’re in school.

How can financial institutions use the survey results and CreditScoreQuiz.org?

We believe an informed customer is the best customer. Financial institutions should encourage their customers and members to take our quiz and further educate themselves about credit scoring and the cost of credit. The “Resources” section of our website, CreditScoreQuiz.org, contains downloadable banners that lenders can post on their consumer facing websites, blogs and Facebook pages, which will link to the quiz.

By demonstrating that they care about financial literacy, lenders can strengthen their relationships with those that use their services.

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