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Be a voice for model choice

One of the tenets of assessing consumer credit risk is that default risk is impacted by economic and demographic changes as well as shifts in consumer behavior. That is one reason why competition among credit scoring model developers is so important for lenders and consumers.

In order to keep pace, as model developers, we must assess market trends and develop the most predictive and inclusive models possible which will in turn allow lenders to keep pace with change. Without healthy competition, there is little incentive to innovate.

With that in mind, I am pleased to share an op-ed I wrote for MortgageMedia.com, a media outlet for mortgage industry policymakers, that posits credit score competition as a tool for the mortgage industry to help shepherd lenders through the next generation of borrowers and credit cycles.

This is an important concept and it is brand agnostic. More competition will force us all to innovate and adapt as the market changes. This is a central theme as we continue to seek adoption in the mortgage market.

You can read the entire article here; however, below is a short excerpt:

A marketplace where lenders can choose among the best models available — and one that is attractive for the next up-and-coming FinTech, start-up, or modeling dynamo — will help shepherd the mortgage industry through the next generation of borrowers.

Consider this: a foundational principle of many incumbent credit scoring models is that a borrower has a lengthy credit history and experience handling a variety of different types of credit accounts.

That fundamentally impacts Millennials and Gen-Zers and puts them at a disadvantage. Data shows that these consumers have focused their credit habits around paying off their student loans and as a result have been reticent about applying for new credit accounts.

What would seem to be a prudent financial decision can cause their credit scores to be lower. But this is a solvable problem.

Model developers and data scientists are always thinking about behavioral changes such as this and how we can more accurately score consumers. Without competition, there is no incentive to innovate and adapt as the market changes.

The backdrop for the op-ed, of course, is that March 21 is the deadline for feedback regarding FHFA’s proposed rule on credit score competition in the mortgage market. The stakes are very high. Market participants are encouraged to provide comments back to FHFA urging decision makers to revise the proposed rule such that it meets the spirit, intent, and language mandated by Congress when it passed Sec. 310 of Public Law 115-174. Section 310 is intended to foster credit score competition and to allow lenders to choose from multiple approved scoring models, provided the models meet the validation and approval process of Fannie Mae and Freddie Mac, in compliance with standards and criteria prescribed by regulation by FHFA.

This may be the sole opportunity FHFA has to create a marketplace in which mortgage lenders and consumers can reap the benefits of credit score competition for the near and distant future.

To submit your feedback, please visit Notice of Proposed Rulemaking and scroll down and click the box that says “Submit Comments.”

We appreciate your support. You’ll find much more information in this month’s newsletter. Included is a data-driven article from TransUnion about the increase in FinTech personal loans and a “Did you know?” that shares how the number of conventionally unscoreable consumers has actually increased. Our “Five Questions with…” guest this month is Michael Bright, the newly minted president and CEO of the Structured Finance Industry Group.

Regards,

Barrett Burns

Did You Know?: 1 in 5 U.S. consumers is conventionally unscoreable?

Did you know that approximately one in five consumers in the United States is considered “conventionally unscoreable” (someone who does not meet the minimum scoring criteria of conventional scoring models and thus cannot be scored)? That’s 1 in 5 who may get overlooked for a loan from a bank, or 1 in 5 who may be subjected to higher interest rates from a lender. In less than a decade, the number of conventionally unscoreable consumers has grown from 36 million to 51 million in 2018 (40 million of which can be scored by more advanced scoring methods employed by VantageScore). 

The infographic below is a visual and simple breakdown of who makes up this pool of consumers and makes a case for why lenders should expand their portfolio using modernized risk assessment tools. If you’d like to share this infographic amongst your constituents, social media channels, etc., please contact us on LinkedIn

 

FinTechs drive personal loan growth

FinTechs Continue to Drive Personal Loan Growth
Q4 2018 TransUnion Industry Insights Report Features the Latest Consumer Credit Trends

The FinTech revolution has propelled unsecured personal loans to another record-breaking quarter. TransUnion’s (NYSE: TRU) Q4 2018 Industry Insights Report found that personal loan balances increased $21 billion in the last year to close 2018 at a record high of $138 billion. Much of this growth was driven by online loans originated by FinTechs.

FinTech loans now comprise 38% of all unsecured personal loan balances, the largest market share compared to banks, credit unions, and traditional finance companies. Five years ago, FinTechs accounted for just 5% of outstanding balances. As a result of FinTech entry to the market, bank balance share decreased to 28% from 40% in 2013, while credit union share has declined from 31% to 21% during this time.

TransUnion also found that FinTechs are competitive with banks, with both lenders issuing loans averaging in the $10,000 range, compared to $5,300 for credit unions. Across all risk tiers and lender types, the average unsecured personal loan debt per borrower was $8,402 as of Q4 2018.

“FinTechs have helped make personal loans a credit product that is recognized as both a convenient and simple way to obtain funding online,” said Jason Laky, senior vice president and TransUnion’s consumer lending line of business leader. “More and more consumers see value in using a personal loan for their credit needs, whether to consolidate debt, finance a home improvement project or pay for an online purchase. Strong consumer interest in personal loans has prompted banks and credit unions to revisit their own offerings, leading to more innovation and choice for borrowers from all risk tiers.”

The Share of FinTech Total Personal Loan Balances Has Grown Rapidly

Year Bank  Credit
Union
  
Traditional
Finance
Company
   
FinTech 
2018 28% 21%
13%
38%
2017 30% 22%
13%
35%
2016 32% 23%
16%
29%
2015 35% 25%
19%
21%
2014 39% 28%
22%
11%
2013 40%
31%
24%
5%

Personal loan originations increased 22% during Q3 2018, marking the fourth consecutive quarter of 20%+ annual origination increases. While the subprime risk tier grew the fastest, prime and above originations (those with a VantageScore 3.0 of 661 or higher) represented 36% of all originations. More than 19 million consumers now have a personal loan product, an increase of two million from a year earlier in Q4 2017 and the highest level ever observed.

Q4 2018 Unsecured Personal Loan Trends

Personal Loan Metric Q4 2018 Q4 2017 Q4 2016 Q4 2015
Total Balances $138 billion $117 billion $102 billion $88 billion
Number of Unsecured Personal Loans 21.1 million 18.2 million 16.9 million 15 million
Number of Consumers with Unsecured Personal Loans 19.1 million 16.9 million 15.8 million 14.4 million
Borrower-Level Delinquency Rate (60+ DPD) 3.63% 3.29% 3.83% 3.62%
Average Debt Per Borrower $8,402 $8,083 $7,640 $7,360
Prior Quarter Originations* 4.6 million 3.8 million 3.5 million 3.8 million
Average Balance of New Unsecured Personal Loans* $6,217 $6,218 $5,443 $5,303

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

“Similar to the personal loan market, we continue to see a solid performance by consumers with auto loans, credit cards, and mortgages,” said Matt Komos, vice president of research and consulting in TransUnion’s financial services business unit. “Consumers continue to have a strong appetite for credit. And while serious delinquency rates are rising for some products, they have remained at low levels. We continue to monitor the credit market for any changes and will have a better understanding of the potential impact the federal government shutdown has had on the credit market during the next quarter.”

Though the federal government shutdown began near the end of the fourth quarter and likely had minimal impact to the Q4 2018 consumer credit metrics, TransUnion is offering support to those people impacted via its website and dedicated government shutdown phone line. Federal employees affected by the shutdown who want to learn how to protect their credit can visit https://www.transunion.com/about-us/government-shut-down.

TransUnion’s Q4 2018 Industry Insights Report features insights on consumer credit trends around personal loans, auto loans, credit cards, and mortgage loans. For more information, please register for the TransUnion Q4 2018 IIR Webinar.

The Number of Consumers with a Credit Card Hits Another Milestone
Q4 2018 IIR Credit Card Summary

The number of consumers with access to a credit card increased to a record 178.6 million at the close of 2018. Over the last four quarters, four million more individuals gained access to card credit. This growth was primarily driven by a 4.3% year-over-year increase in subprime borrowers, alongside a 3.1% year-over-year increase in prime plus and super prime. Subprime also led the other risk tiers in originations in Q3 2018, with a 9.6% year-over-year increase in originations. Overall, balances grew by 4.9% year-over-year, with growth occurring across all risk tiers for the 19th straight quarter. This included super prime balance growth of 6.8% year-over-year and subprime balance growth of 7.2%. Credit lines matched balance growth at 4.9% year-over-year in Q4 2018, ending a nine-quarter trend of balance growth exceeding credit line growth. The report also found that serious delinquency rates rose to 1.94%; however, they remain well below recession-era levels and are near the “new normal” mark.

Instant Analysis

“Balance growth was highest at opposite ends of the risk spectrum. Super prime balance growth was attributed to an increase in the number of super-prime consumers with access to a credit card coupled with strong spend this past holiday season. However, the subprime segment was also a major driver of origination, balance and 90+ DPD delinquency trends this quarter.” - Paul Siegfried, senior vice president and credit card business leader at TransUnion

Q4 2018 Credit Card Trends

Credit Card Lending Metric Q4 2018 Q4 2017 Q4 2016 Q4 2015
Number of Credit Cards 429.9 million 418.6 million 404.4 million 381.2 million
Borrower-Level Delinquency Rate (90+ DPD) 1.94% 1.87% 1.79% 1.59%
Average Debt Per Borrower $5,736 $5,644 $5,486 $5,337
Prior Quarter Originations* 16.4 million 16.3 million 17.5 million 15.4 million
Average New Account Credit Lines* $5,247 $5,194 $5,373 $5,068

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

Auto Originations on the Upswing, Though This Trend May Not Last
Q4 2018 IIR Auto Loan Summary

After a steep decline in originations in Q3 2017, originations grew by 0.5% year-over-year in Q3 2018, with above prime consumers leading the growth. Originations are viewed one quarter in arrears to account for reporting lag. While subprime saw a slight 1.7% year-over-year increase in originations, the origination mix continues to shift toward the above prime segments, with prime plus and super prime share together increasing 0.9% year-over-year. Total balances grew at a slower rate of 4.6% year-over-year, the lowest Q4 year-over-year increase since 2011. Delinquencies have remained stable with little to no change across most risk tiers.

Instant Analysis

“Our financing model has given us valuable insight into the auto finance market and as such, we expect demand for new vehicle loans to continue to soften in 2019. Even as lenders continue to make credit available to subprime borrowers, we expect them to balance this demand and anticipate originations to flatten. However, steady delinquency rates continue to highlight the underlying positive health of the auto finance market despite potential headwinds such as auto tariffs and additional interest rate increases.” - Brian Landau, senior vice president and automotive business leader at TransUnion

Q4 2018 Auto Loan Trends

Auto Lending Metric Q4 2018 Q4 2017 Q4 2016 Q4 2015
Number of Auto Loans 82 million 79.4 million 75.8 million 71.1 million
Borrower-Level Delinquency Rate (60+ DPD) 1.44% 1.43% 1.44% 1.27%
Average Debt Per Borrower $18,858 $18,597 $18,391 $18,004
Prior Quarter Originations* 7.1 million 7.1 million 7.5 million 7.5 million
Average Balance of New Auto Loans* $21,520 $20,909 $20,743 $20,245

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

Mortgage Market Continues to Soften Even as Delinquencies Drop
Q4 2018 IIR Mortgage Loan Summary

Serious mortgage delinquency rates have continued to remain low. The serious delinquency rate for Q4 2018 was 1.66%, down from 1.86% at the same time last year. In addition, 15 of the 20 largest MSAs experienced double-digit year-over-year percentage declines. Even as mortgage originations continue to remain low relative to past years, TransUnion observed a slight increase in lending activity to subprime borrowers. Originations to subprime borrowers increased 2.1% over the same time last year, while all other risk tiers experienced an average of a 4.3% decline. The overall origination risk mix remained largely stable with subprime originations making up less than 4% of originations and prime and above originations making up over 80% of total originations. This quarter, average new mortgage account balances dropped to $227,376 from $228,563 in Q4 2017.

Instant Analysis

“Only three MSAs, Houston, Miami, and Tampa, experienced an uptick in year-over-year delinquencies. This was expected, as the comparison point is Q4 2017, a quarter when those MSAs experienced an artificially low delinquency rate due to natural disaster forbearance programs. The decrease we’re seeing in new account balances could be due to a number of factors, the largest of which may be a change in the mix of mortgage originations from high-priced MSAs to low-priced MSAs. Of the top 20 MSAs, those with an average new account balance of over $270,000 had a decline of 17% in year-over-year originations, while those with an average new account balance of less than $270,000 saw only a 2% decline in year-over-year originations.” - Joe Mellman, senior vice president and mortgage business leader at TransUnion

Q4 2018 Mortgage Loan Trends

Mortgage Lending Metric Q4 2018 Q4 2017 Q4 2016 Q4 2015
Number of Mortgage Loans 52.8 million 53.2 million 52.0 million 52.6 million
Borrower-Level Delinquency Rate (60+ DPD) 1.66% 1.86% 2.28% 2.46%
Average Debt Per Borrower $206,922 $201,736 $194,415 $189,914
Prior Quarter Originations* 1.8 million 1.9 million 2.2 million 1.9 million
Prior Quarter Average Balance of New Mortgage Loans* $227,376 $228,563 $235,820 $214,799

*Note: Originations are viewed one quarter in arrears to account for reporting lag.

About TransUnion (NYSE:TRU)

Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends, and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information, and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America, and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.

We call this Information for Good.SM 

http://www.transunion.com/business

5 Questions with … Michael Bright

As of January 2019, Michael Bright became the Structured Finance Industry Group’s (SFIG) new president and CEO. He will lead“Feb2018” SFIG’s education, policy, and advocacy initiatives, helping to achieve the group’s goal of building the broadest possible consensus among members across the industry, and reinforcing the understanding that securitization is an essential source of core funding for the real economy. 

Coming off a successful SFIG Vegas, we were able to gather his thoughts on his new role and the latest conference.

1. Last month’s SFIG Vegas conference had record-setting attendance. Why do you think there was a surge this year?

There is a lot of energy around SFIG right now. The credit cycle has gone on for a long time, and that means, for a lot of folks, business has been good. But people are wondering “what’s around the corner?” I think the securitization industry is pretty well-prepared for a slowdown, but everyone is certainly doing their due diligence. Public policy remains a big question mark as well, and so members are engaged on that front, too. Finally, the industry is definitely interested to see what the future holds for our organization. 

2. At the conference, you mentioned that housing reform is on the horizon yet still not set in stone. There have been many who have voiced recommendations for reform, including a proposal from one of your former posts at Milken. What recommendations are you leaning toward, especially from the securitization industry’s perspective?

Housing finance reform has so many difficult issues. Everyone should be concerned with questions such as how do we safely ensure that all communities have access to safe and decent housing, especially during a time of great demographic change? And, of course, what is the right role for the taxpayer? At SFIG, my job is to advocate for a system that can work through all business cycles and that, ideally, has clearly defined roles for the government and for private capital.

3. As the newly minted president of SFIG, what are your priorities for the coming year?

Making sure we are seen as a resource for policymakers and as a leader in our industry. If the securitization industry is willing to fully embrace and appreciate how essential its role in the economy is, and take that responsibility seriously, we can completely change the way financial services serve the real economy. And we can have very productive discussions with policy-makers along the way.

4. SFIG is uniquely positioned to weigh in on issues with a holistic viewpoint that is comprehensive of the secondary market. How might this be leveraged to make policy changes and improvements?

We need to both talk to and listen to policy-makers.  Industry participants have one perspective, and they are responsible for a set of stakeholders. Policy-makers have an entirely different set of stakeholders.  But, at the end of the day, voters and the people in the real economy that we serve are the same people. If we just work a bit more to understand that, we can better connect with the public and with policy-makers in Washington.

5. What do consumers and laypeople need to know about the securitization industry and what your members do?

That if we do our job well, we add tremendous value to the economy. Conversely, when we make mistakes, those mistakes have real consequences. We should hold ourselves accountable, in part so that others don’t have to.

Mr. Bright has extensive hands-on experience as a policymaker, practitioner and leader across all aspects of the securities industry. He joins SFIG from Ginnie Mae, where he was executive vice president and chief operating officer, managing all operations for Ginnie Mae’s $2.0 trillion portfolio of mortgage-backed securities. He brings a track record of policymaking achievement from his time on the staff of U.S. Senator Bob Corker and the Senate Banking Committee. Prior to joining Ginnie Mae in 2017, Mr. Bright was a director at the Milken Institute’s Center for Financial Markets, where he led the institute’s housing program. He was previously a member of BlackRock’s financial advisory unit.

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