FICOTM. Consumer Credit Risk North America Trends and Expectations FIRST QUARTER 2014

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1 Consumer Credit Risk North America Trends and Expectations FIRST QUARTER 2014 A Survey by the Professional Risk Managers International Association March 2014 w w w. P R M I A. o r g PRMIA thanks our survey sponsor FICOTM

2 ACKNOWLEDGEMENTS The Professional Risk Managers International Association (PRMIA) is a higher standard for risk professionals, with over 65 chapters around the world and nearly 90,000 members. A non-profit, member-led association, PRMIA is dedicated to defining and implementing the best practices of risk management through education including the Professional Risk Manager (PRM ) designation and Associate PRM certificate; webinar, online, classroom and in-house training; events; networking; and online resources. More information can be found at FICO (NYSE:FICO) delivers superior predictive analytics that drive smarter decisions. The company s groundbreaking FICOTM use of mathematics to predict consumer behavior has transformed entire industries and revolutionized the way risk is managed and products are marketed. FICO s innovative solutions include the FICO Score the standard measure of consumer credit risk in the United States along with industry-leading solutions for managing credit accounts, identifying and minimizing the impact of fraud, and customizing consumer offers with pinpoint accuracy. Most of the world s top banks, as well as leading insurers, retailers, pharma businesses and government agencies rely on FICO solutions to accelerate growth, control risk, boost profits, and meet regulatory and competitive demands. FICO also helps millions of individuals manage their personal credit health through FICO: Make every decision count. PRMIA would like to extend special appreciation to The Center for Decision Sciences at Columbia Business School for their assistance in analyzing the survey responses. The Center for Decision Sciences brings together scholars from a range of fields who share an interest in human decision making. The center facilitates research and understanding on consumer behavior, the implications of decision making on public policy, and the neurological underpinnings of judgment and decision making. The center is housed within Columbia Business School, widely acknowledged as being among the world s top business schools. To learn more, visit 2 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

3 EXECUTIVE SUMMARY Since the first quarter of 2010, FICO and PRMIA have polled bank risk professionals each quarter regarding their predictions for the next six months and the impact of current events on their field. This quarter shows consistency with previous quarters; however, it also begins to highlight a growing uncertainty when it comes to consumers use of credit. A picture is forming wherein consumers request and utilize higher amounts of credit; however, some risk managers worry that delinquency levels may be on the rise. While this doesn t appear true in terms of mortgage and refinancing predictions, areas such as credit cards seem to be a source of modest concern, while student loans continue to be a source of significant concern. Key findings and predictions about the next six months: In most categories of delinquency, a near majority believes that levels of delinquency will stay the same; however, 43.8% look for levels of credit card delinquencies to rise and 49.8% look for levels of student loan delinquencies to rise. Many respondents (57.3%) feel that interest rates for consumer credit will increase. Similarly, 65% feel that the average balance on credit cards will increase as well. Sentiment appears mixed when discussing how much credit will be extended by lenders, with equal numbers (41.6%) feeling it will stay the same or increase somewhat. A majority, when looking at the total number of delinquencies, expect them to remain the same (50.5%), suggesting that if credit card delinquencies rise, other levels may lower to offset. A plurality (43.7%) predicts the supply of credit for residential mortgages will fall short of demand. While a third of respondents (32.7%) caution that the future is unknown, nearly a quarter of respondents (25.9%) feel we re in for a bumpy ride. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 3

4 SURVEY DETAILS KEY FINDINGS AND ANALYSIS Sentiment Mixed in Delinquency Predictions Looking at the industry as a whole, over the next six months, do you expect: (check all that apply) The level of residential mortgage delinquencies (of 90 days or more) to The level of home equity line delinquencies to The level of credit card delinquencies to The level of auto loan delinquencies to The level of small business loan delinquencies to (As a general guideline, the SBA Office of Advocacy defines a small business as an independent business having fewer than 500 employees.) The level of student loan delinquencies to 0% 10% 20% 30% 40% 50% 60% Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly 4 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

5 SURVEY DETAILS In Q1 the FICO/PRMIA survey found a pattern of results that suggests an optimistic outlook on the next 6 months, with two notable trends that may be areas of interest in the future. Regarding residential mortgages, many (44.5%, down less than 2% from last quarter) still believe that the level of residential mortgage delinquencies will stay the same, compared to 52.7% in Q Similarly, a plurality (48.5, up 1.2% from Q4 2013) also believes that the level of home equity line delinquencies will remain the same, compared to 53.2% in Q Credit card debt, however, appears a slightly different story, with nearly half (43.8%) expecting the level of credit card delinquencies to increase, while 36.7% expect levels to remain the same. This is the first time in several quarters that predictions of increase have outweighed status quo in this category. In terms of why this prediction may have shifted, one will also notice changes in consumer credit predictions, discussed below, which may have made an impact in predictions of delinquencies. Looking at auto loan delinquencies, the majority of respondents felt that the level of delinquencies would either stay the same or decrease (64.8%, down from 77.2% in Q4 2013). Finally, many respondents (45.3%, down 2% from Q4) believe that the level of small business loan delinquencies will stay the same, with more looking for an increase (34.2%) than a decrease (20.5%), echoing a trend observed in Q Finally, in a trend present over several quarters, a near majority (49.6%) predict that the level of student loan delinquencies will increase over the next six months. While this is not the highest number of individuals making this prediction, it is significant and meaningful as an indicator of overall weariness when it comes to student loans. However, despite the view on student loans and credit cards, overall the delinquency picture is optimistic, with many feeling that we will stay the course in terms of delinquency levels over the next six months. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 5

6 SURVEY DETAILS Consumer Credit Outlook: What Will Consumers Do? Looking at the industry as a whole, over the next six months, do you expect: (check all that apply) Interest rates for consumer credit to The approval criteria for common credit and loan products to The average balance on credit card accounts to The volume of credit/ loan applications to The aggregate amount of credit requested by consumers to The approval rate of credit/ loan applications to The amount of consumer credit extended by lenders to 0% 10% 20% 30% 40% 50% 60% 70% Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly 6 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

7 SURVEY DETAILS In regard to underwriting, respondents seem to hold a similar sentiment to that which was reported in past quarters. For example, while a large majority in Q (72.2%) believed that interest rates for consumer credit would increase, Q4 saw this number drop to 52.4%, and the present survey finds it steady in the middle at 57.3%. Many (43.4%, similar to 48.3% in Q4) still expect the approval criteria for credit and loan products to stay the same, and a majority (65%, up 7.4% from Q4) look for consumers to be comfortable carrying a higher average balance over on their credit cards. Additionally, 50.5% see the volume of credit/loan applications rising (slightly down from last quarter), while a majority (61%) also predict the aggregate amount of credit requested to increase (this number virtually unchanged since Q4). Sentiment seems to be wait-and-see: Rates will go up somewhat, average balances and amount of credit requested will go up as well. This seems to fit well with the possible increase in delinquencies predicted above. Risk managers know consumers will want more credit and carry a higher balance, but will they be able to keep their credit houses in order? Returning to predictions, many (40.2%) feel that the approval rate for consumer credit and loans will remain the same, and respondents appear split on the question of the amount of consumer credit that will be extended by lenders: 45.3% believe this amount will increase, while 41.6% believe it will stay the same. A similar split in sentiment was observed in Q In sum, the predictions of the next six months show an attitude of uncertainty regarding consumer credit usage and need, but not one of overt concern. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 7

8 SURVEY DETAILS Consumers Will Ask For More Credit, Impact on Delinquencies Unknown Looking at the industry as a whole, over the next six months, do you expect: The number of existing customers who request credit-line increases to The total number of delinquencies (of 90 days or more) on consumer lending products to Increase significantly Increase somewhat Remain the same Decrease somewhat Decrease significantly The number of new delinquencies (of 30 days or more) on consumer lending products to 0% 10% 20% 30% 40% 50% 60% Previously, the FICO/PRMIA survey had found that most respondents believed they would see more credit-line increase requests over the next six months than they currently did (60.5% in Q4 2013, 51.7% in Q2 2013, 57.5% in Q1 2013), with only around a third looking for the amount of credit-line increase requests to stay the same. The present survey again finds 54.7% predicting that the number of existing customers who will request credit-line increases will rise, with a smaller amount (39.8%) predicting levels will remain the same. At the same time, a small majority (50.5%) predict the total number of delinquencies will stay the same smaller than the 51.3% in Q4, and the 62.3% in Q3. Finally, a plurality (44.7%) believes that the number of new delinquencies will remain the same, down slightly from Q4. Overall, the numbers suggest consumers are asking for more credit, with the total number of delinquencies hopefully staying the same. Coupled with the predictions of delinquency rates in the earlier questions discussed above, the minority who have kept a critical eye on consumer credit appear to be growing in number. Therefore, it is hard to predict exactly where delinquencies for consumer credit are heading, likely due to ambiguity in regards to credit card behavior. 8 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

9 SURVEY DETAILS Small Business Outlook Suggests Growth Looking at the industry as a whole, over the next six months, do you expect: The aggregate amount of credit requested by small businesses to The approval rate of credit/loan applications from small businesses to The amount of credit extended to small business by lenders to 0% 10% 20% 30% 40% 50% 60% 70% Increase significantly Increase somewhat Remain the same Decrease somewhat Decrease significantly Previous FICO/PRMIA surveys have shown increased optimism regarding small businesses use of credit, and while the present survey isn t pessimistic, the optimism appears to have tapered. A large majority (65%, down slightly from 66.7% in Q4 2013) predict that the amount of credit requested by small businesses will increase. Approval rates, throughout last year predicted to remain stable, are expected by many (42.3%) to stay the same, slightly down from Q4 (48.8%) which itself was down from Q3. In these cases, it appears individuals are beginning to move toward a prediction of decrease. Finally, many (42.5%) believe that the amount of credit extended to small businesses will increase over the next six months, slightly less than the amount predicting such an increase last quarter. Overall, the picture of small business lending over the past year continues to be one of optimism of status-quo, with large shifts in behavior not predicted. A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 9

10 SURVEY DETAILS Credit Supply Over the next six months, do you expect The supply of credit for residential mortgages to The supply of credit for mortgage refinancing to The supply of credit for credit cards to The supply of credit for auto loans to The supply of credit for small business loans to The supply of credit for student loans to 0% 10% 20% 30% 40% 50% 60% 70% Fall significantly short of demand Fall slightly short of demand Slightly exceed demand Significantly exceed demand Meet demand Beginning in Q3 2012, credit supply became a major focus of the survey. The survey breaks this topic into multiple categories. In three of the six categories polled (supply of credit for credit cards, auto loans, and student loans), a majority of respondents felt that supply would meet demand. In two other categories (supply of credit for mortgage refinancing and small business loans), a plurality of respondents felt supply would meet demand. However in contrast, 43.7% believe that the supply of credit for residential mortgages will fall slightly or significantly short of demand, a surprising new trend present this quarter. This suggests that, while supply and demand have been closely matched in the marketplace up to this point, some predict the possibility of a deficit for large lump-sum purchases versus smaller amounts of debt. This area will be one to watch in future FICO/PRMIA survey reports. 1 0 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

11 SURVEY DETAILS Current Topics: HELOC Recasting Risk, Outlook and Influencing Factors The FICO/PRMIA survey devotes a number of questions each quarter toward current topics. One current topic examined this quarter was the fact that the OCC and other agencies have noted as of late that there is growing risk related to Home Equity Lines of Credit (HELOC) end-of-draw issues (i.e., recasting). The FICO/PRMIA survey found that twothirds of respondents (67.1%) were concerned about such issues, with most (48.5%) being only somewhat concerned. This suggests the end-of-draw issue may be an area to watch over future quarters. The OCC and other agencies have noted growing risk as it relates to the HELOC end-of-draw issue (i.e., recasting). How concerned is your institution about this issue? 48.5% 13.7% 4.9% 32.8% Not concerned Somewhat concerned Concerned Very concerned A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 1 1

12 A similar question was posed regarding the statement risk managers would be most likely to say if asked about their feelings regarding the next six months. Nearly a third (32.7%) agreed with the statement Nobody knows what the future holds, while slightly less (27.3%) believed that one should Get while the getting is good. A third group (25.9%) felt we should Buckle up. We re in for a bumpy ride, with a small number (8.3%) feeling that an Iceberg, [was] dead ahead! Lastly a small number (5.9%) had a whimsically optimistic outlook: It s all sunshine and lollipops! Which one of these statements best reflects your feelings about the health of consumer lending over the next six months? 5.9% 27.3% 8.3% 25.9% 32.7% Buckle up. We re in for a bumpy ride. Iceberg, dead ahead! It s all sunshine and lollipops. Get while the getting is good. Nobody knows what the future holds. Turning from outlook to current practice, the current FICO/PRMIA survey also asked about compelling forms of collateral that risk managers would be willing to accept. A plurality (41.2%) felt that of the items on the list, gold coins were the most compelling form of collateral. Smaller numbers favored stock certificates (28.9%) and a car (14.2%). Other items, such as diamond jewelry (10.3%), works of art (3.9%), and a baseball card collection (1.5%) were less valued as forms of collateral. What type of collateral would you find most compelling for a loan (assuming all of these items would be inspected and/or authenticated to verify their value)? 28.9% 14.2% 1.5% 3.9% 10.3% 41.2% Gold coins Stock certificates Car Baseball card collection Diamond jewelry Works of art 1 2 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

13 Historical Analysis Over 16 quarters, a variety of trends have been noted by the FICO/PRMIA survey. As with last quarter, the analysis this quarter does not appear to be significantly affected by any one item at an historic high or low. Nonetheless, various elements are present in the data, such as: Across the tracked questions, there appears to be no historic high or low prediction this quarter. That is, in itself, notable in terms of the status quo feeling shown in many of the responses given. This is similar to Q4, where only 1 historic high/low was observed. Only 5.5% predict a decrease in the amount of credit requested by consumers, the second lowest level on record, with the lowest (5.2%) coming last quarter. This suggests again that the level of consumer credit requested will continue to rise far off of the historic high (Q3 2010, when 24% expected a decrease). Predictions in auto loan delinquency decreases were unchanged from Q to Q4 (22.9% expect a decrease). Overall, this category appears to be returning to levels, compared to a period last year in which between 28-32% expected a decrease. 8.2% expect a decrease in the average balance on credit cards, less than 2% off the historic low of 6.5% in Q At one time (Q2 2010), a third (33.3%) expected these levels to decrease. Mortgage Delinquencies 48% 46.9% 46% 44% 42% 40% 38% 38.5% 36% 34% 32% 31.2% 30.4% 30% 31.3% 28.8% 28% 26% 26% 28.1% 26.9% 24% 22% 20% 18.1% 18.3% 18% 15.1% 14.8% 16% 13.4% 14% 12% 10% 12.7% 10% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Mortgage delinquencies percent of respondents expecting a decline Home Equity Delinquencies 42% 40.6% 40% 38% 36% 36% 34% 32% 29.7% 30% 27% 28% 29.4% 27% 26% 24% 23.1% 22% 20.9% 22.2% 23.9% 24.7% 20% 18% 17.5% 18% 16% 14% 12% 16.4% 16.2% 10% 10% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Home equity deliquencies percent of respondents expecting a decline A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 1 3

14 Credit Card Delinquencies 40% 35% 30% 36.3% 31.4% 26.9% 27.7% 29.7% 28.3% 25% 20% 15% 23.4% 20.7% 22.8% 21.3% 27.1% 22.8% 25.3% 23.3% 19.4% 10% 5% 9.1% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Credit card delinquencies percent of respondents expecting a decline Student Loan Delinquencies 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 15.4% 14.5% 13.3% 12.7% 12.8% 12.4% 12.3% 12% 11.3% 9.2% 7.6% 9.1% 11.6% 8.5% 8.3% 6.9% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Student loan delinquencies percent of respondents expecting a decline Total Loan Delinquencies 35% 30% 25% 20% 15% 10% 5% 29.3% 17.5% 20.8% 25.2% 23.7% 24.1% 20.1% 18.1% 18% 17.7% 20.9% 18.8% 16.3% 11.3% 12.8% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Total number of delinquencies percent of respondents expecting a decline 1 4 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

15 Auto Loan Delinquencies 40% 35% 30% 25% 20% 24% 37.2% 22.4% 32.1% 21.1% 34.4% 32.2% 30.4% 28% 25.3% 25% 21.9% 25.4% 22.9% 22.9% 15% 10% 15.4% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Auto loan delinquencies percent of respondents expecting a decline Small Business Loan Delinquencies 40% 35% 30% 25% 20% 36.2% 18.5% 20.6% 28.1% 30% 29.9% 26.5% 26.3% 20.5% 23.7% 27.4% 25% 25.8% 20.5% 15% 10% 11.5% 16.6% 5% 0% Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Small business loan delinquencies percent of respondents expecting a decline A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 1 5

16 Your job (select most appropriate) RESPONDENT PROFILE 40% 34.1% Chief Risk Officer Functional leader Portfolio/product management Business/risk analyst 6.8% Other 9.3% 9.8% Many respondents (40%) identified as business or risk analysts, up about 6% from the last quarter. Smaller percentages of respondents identified as functional leaders (9.8%), portfolio or product managers (9.9%) or Chief Risk Officers (6.8%). Slightly over a third of respondents, 34.1%, indicated that their most appropriate job was not listed, suggesting that many hybrid risk management roles exist within the modern financial institution. What is your area of responsibility (check all that apply)? 60% 50% 40% 30% 20% 35% 48.9% 20.4% 24.8% 42.3% 14.6% Card portfolio Mortgage portfolio Auto loan portfolio Direct deposit accounts Lines of credit Student loans 10% 0% Respondents were allowed to indicate all areas of risk that they participate in or are responsible for. Similar to previous surveys, most respondents (48.9%) were involved in managing a mortgage portfolio, with fewer numbers responsible for lines of credit (42.3%), card portfolios (35%), Auto loan portfolios (20.4%), and direct deposit accounts (24.8%). As respondents were allowed to select as many areas as they felt they had responsibility over, it is interesting to find that most respondents selected multiple areas, a finding also noted over past quarters. 1 6 T H E P R O F E S S I O N A L R I S K M A N A G E R S I N T E R N A T I O N A L A S S O C I A T I O N

17 What is the size of your institution (by total assets)? What is the business orientation of your institution (select the most appropriate)? 9.5% 3.2% 1.6% 5.3% 9% 29% 5.3% 9% 48.7% 36% 43.5% Up to $5 billion $5 $10 billion $10 $20 billion $20 $40 billion $40 + billion Wealth management, investments, retirement services Full service bank Discount and/or self-serve financial services Mortgage Lender Credit union Credit card monoline Nearly half (48.7%) of respondents worked in wealth management, investments, or retirement services. Also represented, a third of respondents (36.0%) worked in a full service bank. Smaller percentages reported working at credit unions, mortgage lenders, and discount/self-serve financial services. By assets managed, the respondent pool contained slightly smaller institutions (up to $5 billion in assets, 43.5%) than larger ($40+ billion, 29.0%). What is the geographic reach of your institution? Most respondents were based in the United States (73.4%), and nearly half worked at a firm with global (49.7%) reach. 26.6% were located in Canada. Also represented in smaller numbers were those at institutions with national (22.8%), regional (15.2% of respondents) and local (11.7% of respondents) reach. 15.2% 22.8% 11.7%.5% 49.7% Global National Regional Local Internet-based A H I G H E R S T A N D A R D F O R R I S K P R O F E S S I O N A L S 1 7

18 FICOTM w w w. P R M I A. o r g