gimme some credit………….. factors considered in the consumer loan process

Gimme some credit…………..Factors considered in the consumer loan process

Ben BrudnockCitizens Bank

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Session topics

• Types of Consumer Loans• Impact of recession on credit underwriting• Underwriting basics• Factors that determine loan approval• Counseling advice• Private student loan evolution• Q&A

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Types of Consumer Loans

• Mortgages• Home Equity, Home Equity Line of Credit (HELOC)• Auto – RV – Marine – Motorcycle• Student Loan (federal or private)• Payday loans• Credit Cards• Personal loans against assets

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Impact of the recession on credit underwriting

• Root cause of the recession: Mortgage defaults• 5.4 million of 45 million (12.07%) mortgages nationwide were

delinquent or in some stage of foreclosure during QI 2009• Nearly 3 million homes foreclosed on during all of 2009 (1 in

45 homes); more than 2x number in 2007• Foreclosures expected to decrease sharply at this point due

to questions surrounding GMAC and JP Morgan Chase foreclosure practices. 56,000 Chase foreclosures on hold currently

• Silver lining: Possible real estate recovery; home prices could stabilize as foreclosure fears ease. Lenders more apt to renegotiate terms rather than foreclose.

• Current consumer loan delinquency rate is 3.0%

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• Faced with mounting losses, lenders tighten standards on new loan applications

• How? • Higher minimum qualification standards (i.e. credit

score, income, co-signer requirements, etc.)• Longer historical look into personal finances• Increased pricing (fees and margins)


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Eased 34% 31% 26% 6% 0% 2%

Unchanged 54% 63% 58% 42% 14% 33%

Tightened 12% 6% 16% 52% 86% 65%

Credit Underwriting Practices: Commercial Products

2005 2006 2007 2008 2009 2010

Office of the Comptroller of the Currency (OCC), a division of the U.S. Treasury Department, publishes an annual survey of Credit Underwriting Practices. Those surveyed included 51 of the largest banks in the country with assets of $3 billion or more. 16 th Annual Survey results include:

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Credit Underwriting Practices: Residential Construction

2005 2006 2007 2008 2009 2010

Eased 21% 25% 17% 2% 0% 0%

Unchanged 72% 64% 50% 36% 8% 36%

Tightened 7% 11% 33% 62% 92% 64%

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Credit Underwriting Practices: Commercial Construction

2005 2006 2007 2008 2009 2010

Eased 29% 32% 28% 8% 0% 3%

Unchanged 63% 56% 59% 43% 20% 25%

Tightened 8% 12% 13% 49% 80% 72%

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Credit Underwriting Practices: Small Business Loans

2005 2006 2007 2008 2009 2010

Eased 13% 19% 11% 11% 0% 0%

Unchanged 81% 76% 76% 72% 36% 34%

Tightened 6% 5% 13% 17% 64% 66%

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Credit Underwriting Practices: Overall retail products

2005 2006 2007 2008 2009 2010

Eased 28% 28% 20% 0% 0% 0%

Unchanged 62% 65% 67% 32% 17% 26%

Tightened 10% 7% 13% 68% 83% 74%

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Underwriting basics

Definition: Loan underwriting is the process a

lender uses to determine whether the risk of lending to

a particular borrower under a particular set of circumstances is

acceptable.

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Underwriting basics

• Automated underwriting functions• Credit Scores• Credit History• Credit Utilization Ratio

• Manual (or semi-manual) underwriting functions• Minimum income requirements• Employment history• Debt to Income ratio (DTI)• Loan to Value ratio (LTV)• Down payment• Collateral / Appraisal

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FICO or Credit Scores Fair, Isaac and Company Developed the algorithm used by most credit bureaus to

calculate a credit score• A FICO score is the most commonly used credit rating• Credit scoring is a quick, objective & consistent method for

lenders to measure the “risk” of an applicant Scores based solely on information in consumer credit reports

maintained at the credit reporting agencies (Experian, TransUnion & Equifax)

• The higher the score, the lower the risk

Loan approval factors: Credit Scores

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Payment history35%

Amounts owed30%

Length of Credit History15%

Types of Credit in

Use10%

New Credit10% These percentages are

based on the importance of the five categories for the general population.

For particular groups – for example, those who have not been using credit for long – the importance of these categories may vary.

Source: www.MyFICO.comSource: www.MyFICO.com

Loan approval factors: Credit Scores

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Is there an average credit score?

According to Experian, the current national average

credit score is….

693

Region Average Credit

East North Central 699

East South Central 684

Middle Atlantic 703

Mountain 690

New England 713

Pacific 695

South Atlantic 686

West North Central

709

West South Central

673

Notes: The average credit score in PA is 705

Experian’s credit score is called the “Vantage Score”

Scores tend to vary at each of the three credit bureaus

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Loan approval factors: Credit history

Lenders may screen for both the length and usage of credit

• Trade lines (individual credit accounts: balances, account status, date opened, credit limit, etc.)

• Credit inquiries (a list of everyone who has accessed your credit report during the past two years, both voluntary and involuntary.

• Public record and collection items (public record data from collection agencies and courts; info includes liens, judgments, bankruptcies and wage garnishments)

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Loan approval factors

• Debt to income (DTI) ratio• How a DTI is determined: Monthly household

liabilities divided by monthly household gross income = DTI (Also known as back-end/before mortgage DTI)

• Example: $3500 monthly bills / $10,000 gross monthly income = 35% DTI

What’s good?

What’s so-so?

What’s not so good?

DTI less than 28%

DTI between 28-36%

DTI greater than 36%

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Loan approval factors, cont.

• Income requirements• Verification of stated income• Minimum income requirements

• Employment history• Length of time with current employer• Document history of full-time employment (references)

• Credit Utilization ratio• Percentage of available credit currently in use• Difficult to determine the right mix

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Loan approval factors, cont.

• Down payment• Good sign of applicants ability to save• 20% of mortgage loan value can avoid PMI insurance

• Property – asset appraisal• Loan to Value (LTV): loan amount / purchase-appraisal price• Interest rates on Home Equity loans are often tied to LTV

percentages

• Co-borrowing• Mandatory for approval when applicants have little to no

credit history and/or income• Can often lead to better rates-fees compared to loans with

one creditworthy applicant

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A recipe for loan approval success

• Solid credit history• No instances of adverse credit / collections for 7 years

• Above average credit score• Best rates & fees for those with 725 or higher FICO

• Verifiable income & low DTI• Current & prior year W2’s and DTI less than 30%

• Borrow jointly• Two creditworthy co-borrowers and better than one

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The evolution of underwriting private student loans

That was then……………Approvals often based solely on FICO

Direct to consumer loans widely available to students without a co-borrower

Best interest rates were lower than Prime

Private loans made widely available to schools below bachelor’s degree level

Originating lenders could easily securitize loans for additional funds

2007 AD

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And this is now………….FICO is vital, but only part of equation

Direct to consumer loans are as common as 8-track tapes and poodle skirts

Interest rates are a function of higher margins

Associate level & below schools have limited private loan availability

Securitization market is weak for student loans; lenders still in the game can no longer “make and sell.”

Remember FFELP?

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School eligibility takes on new significance Lenders establish eligible school criteria based on:

• CDR thresholds

• Programs of study

• Geographic restrictions

• Graduation rates

• Retention rates

• Accreditation “Whad’ya mean Faber’s not on your eligible school list?!?!?”

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Questions and discussion

Citizens BankEducation Finance800.708.6684

gimme some credit………….. factors considered in the consumer loan process

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