To mimic the famous Mark Twain quip, perhaps reports about the drastic demise of the auto finance industry are greatly exaggerated.
As some commentators latched onto delinquency metrics shared recently by the Federal Reserve Bank of the New York, auto default data contained in the latest the S&P/Experian Consumer Credit Default Indices showed improvements in January both on a sequential and year-over-year basis.
S&P Dow Jones Indices and Experian reported this week that the auto loan default rate in January fell 4 basis points from the previous month to 0.99 percent. The latest reading is also 8 basis points lower than the opening month of 2017.
As previously reported in SubPrime Auto Finance News, the New York Fed data attracted plenty of attention since it revealed more than 7 million contract holders were in delinquency. However, Fed analysts offered some perspective by drilling deeper into that information.
Default data compiled by S&P Dow Jones Indices and Experian showed that the auto metric has been below 1 percent for 8 of the past 12 months and currently sits 12 basis points below the high point analysts have seen during the past five years. That high-water mark for auto defaults was 1.11 percent recorded in January 2014 and again in October and November of 2017.
Meanwhile turning back to the January information, S&P Dow Jones Indices and Experian determined the composite rate — which represents a comprehensive measure of changes in consumer credit defaults ticked up 1 basis point from previous month to land at 0.90 percent.
Analysts noticed the bank card default rate rose 8 basis points to 3.42 percent, while the first mortgage default rate came in 2 basis points higher at 0.69 percent.
Looking at the five largest U.S. markets that S&P Dow Jones Indices and Experian watch for each monthly default update, three cities posted higher default rates in January compared to previous month.
The rate for Miami increased 26 basis points to 2.19 percent, while the rate for Dallas climbed 4 basis points to 0.89 percent.
New York’s default rate ticked up 3 basis points to 0.99 percent as the rate for Chicago remained unchanged in January at 0.88 percent
Finally, the rate for Los Angeles decreased 3 basis points to enjoy the lowest reading of these five cities at 0.49 percent.
Following a month where default rates for all loan types increased, David Blitzer pointed out January data showed default rates changed little from the prior month. The managing director and chairman of the Index Committee at S&P Dow Jones Indices explained the longer-term trend shows that default rates have mostly stabilized.
Blitzer added the composite rate has fluctuated within a narrow band as the last time this rate was more than 10 basis points off of the current level was nearly four years ago in March 2015.
“The uptick in the bank card default rate combined with a decline in the auto default rate reflects volatility in the consumer economy,” Blitzer said. “Coming off some swings in market sentiment and recovering from the government shut down, there was a sharp drop in December retail sales and a pullback in January automobiles sales.
“Consumer sentiment has also bounced around, but has recovered in the latest reports. Consumers and investors are both trying to discern which trends will shape the 2019 economy,” he continued.
Blitzer closed by making one more forward-looking point.
“Despite continuing uncertainty about economic policy, two factors favorable to the economy persist: low inflation and a strong labor market. These trends should support the economy and limit any increase in consumer credit default rates,” he said.
“The risks facing the economy in the first half of 2019 are in trade where tariffs or Brexit could upset things, and in the financial sector where worries about corporate earnings and anxiety of possible Fed rate hikes could spook the markets,” Blitzer went on to say.
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
Dumb question: Who wants to make more money? We all do, of course. But is opening your business to more credit-challenged consumers worth chasing more delinquencies and repos? Good question; and one that becomes problematic if you don’t take the right steps to minimize your risk. But, can I reduce risk and make more money without spending more? Great question.
Traditionally, the industry’s approach to managing risk involves manual processes that are tedious and time-consuming. Maintaining and following up on exhaustive consumer records of everything — phone numbers, addresses, employment — requires time and manpower you simply don’t have. As a result, taking on the operational cost of expanding your subprime business could be a nonstarter. One look at the consumer contact and employment statistics for this market segment underscores the burden.
The information chase
According to the FactorTrust Underbanked Index: Consumer Stability report, a borrower who has changed his or her mobile phone number four or more times over a 90-day period has a 77 percent higher default risk than a borrower who has done so only twice. Additionally, a borrower who has had three or more ZIP codes over a 90-day period has a 63 percent higher default risk than a borrower with one ZIP code. Further, among the underbanked, 16 percent applied with a different employer within 30 days, 20 percent within 60 days, 23 percent within 120 days and 34 percent within one year.
Remember the Wayne Gretzky quote, “I skate to where the puck is going to be, not where it has been?” Keeping up with subprime consumers is like trying to predict where that puck will be, which is nearly impossible without the tools to help.
If cars could talk
There is an option for managing risk in the subprime market that supplements a dealer’s ability to vet these consumers: gathering vehicle intelligence. With advances in aftermarket telematics and driver analytics, the latest technology can provide customer insights far beyond the standard vehicle location data associated with early GPS systems.
When it launched onto the buy-here, pay-here scene more than 15 years ago, GPS made it much easier to find a vehicle for repo. Over the years, the technology has evolved to look at location data over time, with the ability to predict where a vehicle will likely be at any time of the day or night with incredible accuracy. For example, the technology can now identify a change of job or home address through deviations in driving patterns. Let’s face it, unless they’re the James Bond type, most people have a set daily routine bouncing back and forth between home and work. Modern GPS solutions can detect major life changes by analyzing location data in relation to time of day, day of week, and pattern frequency.
Similarly, these same algorithms can automate and expedite loan stipulations that typically require hours of calling to verify addresses and workplace information. It’s also useful in preparing agents for repossession, when needed, to better target the right place and time for recovery. Accurately predicting vehicle location under specific circumstances (such as during Monday night football) leads to easier, less costly and less risky recoveries.
Smart solutions combine vehicle intelligence with proactive alerts to further reduce operational costs. Cars that aren’t driving, aren’t paying, so automated alerts for “non-driving” scenarios, such as vehicles impounded to tow lots, abandoned vehicles, and battery disconnects save dealers thousands of dollars each year. The ability to set geo-fences — virtual boundaries around key locations like tow lots, state borders and ports of entry — can help you keep your finger on the pulse of your assets without any effort on your part.
As with any technology purchase, reliability should be one of the main evaluation criteria. Leading GPS providers have always-on platforms (ask about uptime and availability rates) and wide-reaching network support that keeps vehicles connected no matter where they roam. You should ask any provider you’re vetting about the quality and quantity of the data its devices track. It’s no longer enough to monitor vehicle location every 24 hours, as was the industry standard. You need near real-time visibility that can only come from telematics devices that report data at 5-minute intervals or less, giving you the confidence to act when action is warranted.
Finally, the unique value of modern telematics is its ability to drive increased payments. Gone are the days when “starter interrupt” was the only way to get the attention of a delinquent customer. With 85 percent of the U.S. population carrying smartphones, the key to customer engagement is mobile. If the GPS technology you’re considering (or currently using) doesn’t offer a mobile component that opens up a soft-touch but high visibility communication channel between you and your customer, keep shopping.
Ask and ye shall receive
To thrive and survive in this hyper-competitive business, dealers must look beyond their current constraints in servicing this segment. Advanced vehicle intelligence offers not only a safer path to do business with the subprime consumer, but also the operational efficiency necessary to improve the bottom line. If you’re thinking about GPS as a recovery tool, think again, and remember what your teacher said back in grade school: “there are no dumb questions” — except the ones you don’t ask your suppliers.
Brian Deeley is a director of product management at Spireon. He can be reached at [email protected].
Experts who compile the S&P/Experian Consumer Credit Default Indices described the readings to close 2018 as a "caution signal."
This week, the teams from S&P Dow Jones Indices and Experian released their default data through December, and they spotted a sizeable jump for auto financing.
The December auto default rate increased 10 basis points to 1.03 percent, representing the largest sequential rise since another 10-bps leap from August to September in 2017.
The auto movement was just part widespread default rises to finish this past year.
The December composite rate — which represents a comprehensive measure of changes in consumer credit defaults — climbed 6 basis points in December to land at 0.89 percent.
The December bank card default rate spiked 25 basis points to 3.34 percent.
And the first mortgage default rate in December came in 3 basis points higher at 0.67 percent.
The jumps continued with analysts looking at the five largest markets they track for their monthly updates.
The rate for Miami vaulted 41 basis points higher to 1.93 percent, while the rate for New York jumped 13 basis points to 0.96 percent.
The default rate for Chicago was up 4 basis points to 0.88 percent.
The rate for Dallas increased three basis points to 0.85 percent while for Los Angeles, the rate edged 2 basis points higher to 0.52 percent.
David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, pointed out that December marked the first time since January 2017 that all loan types and all major markets showed a higher default rate month-over-month.
However, with one exception; index levels remain in line with or lower than levels one year ago. The Miami index is nearly twice its level of a year ago due to a sharp increase in the first mortgage component.
“Consumer credit default rates are giving a caution signal,” Blitzer said. “It has been almost two years since default rates across the three sectors and all five cities tracked in this report rose together. The chart shows that defaults on bank cards have resumed their uneven upward trend.
“A recent report from the New York Federal Reserve Bank notes that rejection rates on credit card applications rose in 2018, as did the number of times lenders cancelled accounts,” he continued. “These trends, combined with gradual increases in market interest rates during 2018, point to increasing pressure on the availability of consumer credit as the economy shifts from the fast path of growth last year to what analysts expect to be a slower, more sustainable pace in 2019.
“The economic pictures behind the three lending sectors — autos, mortgages and bank cards — reveal different patterns,” Blitzer went on to say. “Housing is pressured by rising prices and higher mortgage rates. Sales of both new and existing homes are weakening. Auto sales were steady in 2017 and 2018 at slightly more than 17 million vehicles sold each year. Retail sales and consumer spending saw continued growth in 2018 with few signs that credit tightening was having any impact.”
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
Black Book responded to auto finance companies and buy-here, pay-here dealers still looking for help on how to comply with upcoming accounting changes in connection with reserving for losses.
On Wednesday, Black Book released a new educational white paper titled, “Analytic-Driven Data Helps Auto Finance Lenders Mitigate Risk & Become CECL Compliant.”
To recap, the Financial Accounting Standards Board (FASB) is looking to ensure that financial institutions have solid measures in place to ensure they have appropriate reserves for any future losses based on the life of each auto loan. As a result, the board has instituted its new Current Expected Credit Loss model (CECL).
The new model will require higher levels of loan loss reserves and lead to changes in lending practices and portfolio management. It will also require a significant amount of data capture, analysis and modeling to meet the implementation deadline of Dec. 15.
With CECL’s requirement that finance companies perform life-of-loan loss forecasting, as soon as the provider says yes to a contract, Black Book explained the company must begin reserving for potential losses on that loan. Black Book emphasized this requirement means each finance company must have a much better understanding of the borrower’s financial condition, as well as accurate historical and residual collateral insight, when they make the loan.
The Black Book white paper discusses how auto finance companies have the opportunity to rely even more on having the most accurate and up-to-date credit and collateral data on their portfolios in order to meet these new requirements.
“Auto finance companies can leverage this opportunity to convert this compliance need into a competitive advantage,” said Anil Goyal, executive vice president of operations for Black Book.
“By leveraging granular data and building loan-level analytic models, auto lenders will have a better understanding of risks and improve return on capital,” Goyal continued.
The white paper also addresses the following topics:
• Probability of default methodology
• Estimations of probability of default and loss given default with model samples
• CECL modeling and data readiness
• CECL’s effect on loan strategies
• How varying economic scenarios can impact lender strategies for CECL
To download the new white paper, go to this website.
Auto finance defaults ticked up slightly in November, but the rate still remained below 1 percent, according to the most recent data compiled by S&P Dow Jones Indices and Experian.
The auto finance segment of the S&P/Experian Consumer Credit Default Indices increased 1 basis point to 0.93 percent, but the reading stayed below that 1-percent mark for the eighth month in a row.
Also, the November 2018 reading is much better than the one 12 months earlier as analysts pegged the November 2017 figure at 1.11 percent.
Turning back to the latest information, analysts indicated the composite rate — which represents a comprehensive measure of changes in consumer credit defaults — also edged 1 basis point higher in November to 0.83 percent.
The bank card default rate was unchanged at 3.09 percent.
The first mortgage default rate was 1 basis point higher at 0.64 percent.
Looking at the latest data by market size, S&P and Experian found that two of the largest cities posted higher default rates in November.
The rate for Miami increased 7 basis points to 1.52 percent, while the rate for Dallas rose 5 basis points to 0.82 percent.
The default rate for Chicago remained stable at 0.84 percent.
The other two cities that analysts track each month showed lower default rates.
The rate for Los Angeles slid 6 basis points to 0.50 percent, while the reading for New York declined 1 basis point to 0.83 percent.
In November, analysts pointed out all loan types showed a default rate within 1 basis point of the prior month. They explained this stabilization coincides with lower default levels, with each of bank cards, autos and first mortgages reaching their lowest levels of 2018 within the past three months.
“Consumer credit default rates across all sectors are stable at low levels,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.
“Two factors supporting the favorable picture are gradual wage increases of about a 4 percent annual rate combined with inflation at 2 percent,” Blitzer continued. “Growth in retail sales at 2.5 percent annual is not putting upward pressure on bank card defaults while flat to lower auto sales have little impact on auto loan defaults.
“Despite home prices rising faster than inflation or wages, mortgage defaults remain steady while home sales drop,” he added.
Blitzer also offered some forward-looking thoughts before 2018 closed.
“Looking ahead, stable default rates will depend on personal incomes and interest rates,” he said. “Rising interest rates — not just the fed funds rate — are being noticed.
“Credit card loan rates topped 14 percent in the third quarter, up more than a percentage point from the 2017 third quarter,” Blitzer continued while adding that, “30-year fixed rate mortgages are approaching 5 percent, up a full percentage point in the past year. The rate for a four-year auto loan is 5 percent after a small increase of a quarter point over 12 months.
“As long as wages outpace inflation and interest rates, the currently low ratio of consumer debt service to income should continue,” he went on to say.
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
Auto finance defaults rose for just the second time this year in October. But the 3-basis point rise is only a fraction of the largest uptick analysts from S&P Dow Jones Indices and Experian have seen during the past 36 months.
Data through October for the S&P/Experian Consumer Credit Default Indices showed the auto-finance reading increased 3 basis points on a sequential comparison to 0.92 percent. The latest rise is less than what analysts noticed back in the summer when the rate moved from 0.93 percent to 0.97 percent, according to the June and July updates.
Rewinding three years, the largest rise auto-finance defaults made occurred in last summer when the August 2017 reading jumped to 0.95 percent from 0.86 percent spotted during the previous month.
Also of note, the auto-finance default metric has remained below 1 percent since April of this year.
Meanwhile, S&P and Experian reported that the composite rate — which represents a comprehensive measure of changes in consumer credit defaults — came in unchanged in October compared to the previous month, sticking at 0.82 percent.
The bank-card default rate dropped 5 basis points to 3.09 percent.
The first mortgage default rate also was unchanged at 0.63 percent.
Looking at the data by geography, analysts noticed two of the major markets posted higher default rates in October.
The data revealed the rate for New York increased 5 basis points to 0.84 percent, while the rate for Dallas climbed 4 basis points to 0.77 percent.
The default rate for Los Angeles remained unchanged at 0.56 percent.
S&P and Experian noticed two cities watched their default rates drop.
The rate for Miami fell 11 basis points to 1.45 percent, while Chicago’s rate ticked 1 basis point lower to 0.84 percent.
After reviewing all of the latest data, David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, pointed out that October marked the sixth consecutive month of lower bank-card default rates. The rate is down 77 basis points from its peak set in April of this year.
Blitzer explained the bank-card activity has been the primary contributing factor to the concurrent decrease in the composite default rate. At 0.82 percent, the composite rate has not been lower since May 2016.
“Continued good economic results are supporting rising consumer spending without any significant increase on consumer credit defaults,” Blitzer said. “Compared to a year earlier, default rates in the three major categories — mortgages, auto loans and bank cards — are down.
“On a monthly basis, auto loans saw a small rise while the bank card defaults dropped, and mortgages were unchanged. While two of the five cities reported here saw an increase in October compared to September, four out of five cities have default rates lower than October 2017,” he continued.
Blitzer then touched on information generated by other sources.
“Three times per year, the Federal Reserve surveys senior bank lending officers on their banks’ credit and loan policies, including autos, mortgages and credit cards. The report shows that banks’ standards for both auto loans and credit card borrowing are marginally tighter now than four months ago in the previous survey,” Blitzer said.
“The mortgage picture differs: 10 percent to 12 percent of the reporting banks indicate that lending standards are easier,” he added. “The easier standards may be a response to the 25 percent to 30 percent drop in demand for mortgage loans reported by the same banks. The softness seen in existing homes sales is seen in the mortgage market.”
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
One of the presenting sponsors of Used Car Week 2018 — Digital Recognition Network — recently set a new company record.
The artificial intelligence and data analytics company that provides vehicle location data and analytics to finance companies, insurance carriers and other commercial verticals, recently announced the company has reached a key milestone, facilitating the recovery of 20,122 live vehicle pickups. The figure enabled by license plate recognition (LPR) established an all-time company high for a given month arrived in August.
“We are very proud that we have reached this critical milestone,” said Todd Hodnett, executive chairman and founder of DRN. “We’ve worked hard to populate the ‘hotlist’, but reaching this milestone would not be possible without the strength of our provider network and its fantastic relationships with our dedicated camera affiliates.
“We remain grateful to our affiliates — the hardworking men and women in the field — who conduct recoveries and often do so under dangerous circumstances,” Hodnett continued.
In recent years, DRN indicated the number of LPR-enabled vehicle pick-ups generated by the ‘hotlist’ has grown substantially year-over-year. In 2017, DRN had nearly 90 percent more live LPR-enabled vehicle pick-ups than in 2016, and the company is on pace to achieve at least that in 2018.
DRN highlighted that it is on track to pay its affiliate network approximately $6 million in revenue share by the end of the 2018 — a company record — with its largest revenue share payout occurring in August, totaling $534,524.
“We will continue to generate the strongest ‘hotlist’ in the market to create opportunity for our affiliate network,” Hodnett said. “In fact, while others in the industry are looking to strip revenue streams away from repossession agents, DRN is committed to a goal of $10 million in 2019 for revenue share payments to our affiliate network.
“We appreciate our affiliates and take great pride in our relationships with them. They are the heart of DRN’s business, and we are grateful for their work every day,” he went on to say.
DRN will make multiple appearances on stage during Used Car Week 2018, which begins on Nov. 12 in Scottsdale, Ariz. There is still time to join leading industry executives and experts for learning, networking and more by going to www.usedcarweek.biz and registering now.
Security National Automotive Acceptance Co. (SNAAC), a non-prime auto finance company, and Primeritus Financial Services, a provider of recovery management, skip-tracing, and remarketing services to the auto finance industry, announced their collaborative partnership on Tuesday.
Primeritus will provide SNAAC its full suite of remarketing services for SNAAC’s automotive portfolio.
“Primeritus has a solid reputation in the industry by helping auto finance companies improve their remarketing strategies and obtaining the highest returns in the auction lanes,” said Chris Mitcham, senior vice president of collections with SNAAC.
“SNAAC is proud to partner with a company that will help us; improve our portfolio results, lower our overall days to sell, manage cost, experience premium lane placement and participate in their vehicle certification process in order to obtain the highest vehicle retention value,” continued Mitcham, who was highlighted in this year’s Remarketing & Used-Car Industry’s 40 Under 40 produced by Auto Remarketing.
Primeritus vice president of remarketing Keith Byrd added, “The team at Primeritus is very excited and proud to partner with an established company like SNAAC. Primeritus has decades of combined experience in the remarketing industry which will also assist SNAAC in achieving their remarketing goals. We look forward to working together and providing an excellent remarketing experience.”
Joe Mappes, executive vice president of Primeritus Financial Services, also commented about this week’s development.
“SNAAC and Primeritus share a common objective; to deliver best-in-class service and results for our clients,” Mappes said. “By utilizing Primeritus’ proprietary remarketing technology, SNAAC will have data and insights relating to key performance indicators in the remarketing cycle which will help drive educated remarketing decisions.
“We are humbled SNAAC has named Primeritus as their trusted business partner in this facet of their collections cycle,” Mappes went on to say.
S&P Dow Jones Indices and Experian determined this week that August defaults remained within the 7-basis-point range analysts have seen for this particular month during the past four years.
According to data through August for the S&P/Experian Consumer Credit Default Indices, the auto finance default rate increased 2 basis points on a year-over-year basis to 0.97 percent.
August 2015 produced the low-water mark for the eighth month of the year based on analyst data going back a decade. In August of that year, the default rate came in at 0.90 percent.
While this past August also represented an uptick for the third consecutive month, S&P and Experian indicated the auto default rate has risen only 4 basis points during that span.
Meanwhile, the August composite rate — which represents a comprehensive measure of changes in consumer credit defaults — ticked 1 basis point higher than the previous month to land at 0.87 percent.
Analysts said the bank card default rate dropped 4 basis points to 3.52 percent.
S&P and Experian also reported the first mortgage default rate crept up 2 basis points to 0.65 percent.
Turning next to the geographic segment of the update, analysts noticed three of the five major cities recorded decreases in composite default rates in August.
Miami showed the largest decrease, falling 11 basis points to 1.57.
The default rate for New York dipped 4 basis points to 0.83 percent, while the rate in Dallas fell two basis points to 0.84 percent.
Chicago’s default rate increased 5 basis points to 0.91 percent, while the default rate for Los Angeles climbed 4 basis points to 0.65 percent.
David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, explained that August generated a continuation of the trends of the prior three months, namely lower bank card default rates as well as lower default rates for Miami. Despite these movements, Blitzer pointed out that the overall composite rate has seen little movement, remaining within a 3-basis-point range during this time.
Blitzer added this broad indicator is consistent with the longer-term trend of stability for the composite rate, which has been between 0.81 percent and 0.97 percent in each of the past 41 months.
“Recent economic reports point to continued stability in consumer credit default rates,” Blitzer said. “A review of economic statistics covering the consumer economy is favorable. Job creation continues at about 200,000 per month with the unemployment rate just below 4 percent and wage gains are approaching a 3 percent annual rate.
While jobs and incomes advance, the spending side is showing modest retail sales growth and auto and home sales are flat to down. These trends favor stable default rates in the near term,” he continued.
“Non-revolving credit outstanding, principally auto loans, continue to grow by 4 percent to 5 percent annually while balances on bank cards and revolving credit grew more slowly in the first half of 2018 than in 2017,” Blitzer went on to say. Consumer balance sheets have been largely restored in the decade since the financial crisis and have room for further credit expansion. Interest rates for both groups of loans rose in response to gradual tightening by the Federal Reserve.
He added, “30-year fixed rate mortgage rates are now around 4.5 percent, auto loans at 5 percent or more, and bank cards in the neighborhood of 15 percent.”
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
Equifax is looking to help banks navigate one of the most complicated accounting changes ever instituted.
On Wednesday, Equifax unveiled its SmartReserve offering to help banks and financial institutions registered with the Securities and Exchange Commission meet the new Current Expected Credit Loss (CECL) standards ahead of the deadline that’s set for the first quarter of 2020.
Equifax reiterated that the new regulation requires significant changes to the data a bank or provider maintains and analyzes, and involves a much deeper level of modelling, analysis and reporting than what has previously been required.
SmartReserve is powered by Equifax Credit Trends, which provides data to help support new CECL standards with respect to customers. The solution can forecast reserves based on this new modelling standard.
“This is new territory for many lenders as they may not have the infrastructure to support these large amounts of data, and mid-tier and smaller banks and credit unions and lenders may not have the capacity to perform the modeling in-house,” said Amy Graybill, vice president of enterprise insights and core data products at Equifax.
“SmartReserve provides the assistance lenders need to help protect their business against non-compliance with new CECL standards, along with historical pre and post-recession data that is needed to accurately forecast future credit losses and calculate required reserves,” Graybill continued.
The company highlighted that Equifax SmartReserve already has provided customers with information to help CECL forecasting by utilizing the extensive data. The data has helped companies evaluate their expected loss and tune their loss reserves.
For small to mid-size financial institutions that may need an outside resource to assist with modeling requirements, Equifax and Moody’s partner together in delivering a comprehensive solution.
“This is a significant departure from current practices and is understandably causing anxiety among both lending institutions and auditors,” said Cristian deRitis, senior director of consumer credit analytics at Moody’s Analytics. “Switching to a measure of potential lifetime loss will not only increase banks’ allowances for loan and lease losses (ALLL), it will dramatically change the timing of those provisions.
“Whereas today a lender can use the interest and principal payments collected early on in the life of new loans to build capital in anticipation of defaults, under CECL they’ll need to add to their reserves before having collected even $1 in loan payments. This could change the economics of the transaction and lead to higher fees or interest rates,” deRitis went on to say.
Additionally, SmartReserve uses the power of Equifax Credit Trends logic to enable the linking of trades over time and life-of-loan forecasting that includes 100 percent of the consumer database where consumers have at least one trade along with key consumer risk profile attributes at time of origination.
The offering also can link trades over time to enable vintage curves, updates and forecasting based on loan and consumer profiles to facilitate critical life-of-the loan forecasting, along with support from Equifax business intelligence and credit data experts.
