FICO 8 Score: Get the Benefits Now!Note: Residential real estate loans include loans secured by one...

FICO ® 8 Score: Get the Benefits Now!

Diane LeiderDirector, Scoring SolutionsFICO

Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent.© 2009 Fair Isaac Corporation. 1

December 2, 2009

Agenda» Market & Scoring Trends

» FICO® 8: More Power Less Pain

» Validation Results

» Mortgage Portfolio Account Management

» Bankcard Portfolio Account Management

» Auto Portfolio Account Management

» Transitioning to FICO® 8

© 2009 Fair Isaac Corporation. Confidential.2 © 2009 Fair Isaac Corporation. Confidential.2

Delinquency Rates Continue to Grow Residential Loans Delinquency Rates Have Risen Above Consumer Loans

US Top 100 Lenders (2003–2009)Percentage of Loans Delinquent 30+ Days

25Consumer Loans Residential Loans Credit Card Loans

15

20Consumer Loans Residential Loans Credit Card Loans

10

15

0

5

0

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

© 2009 Fair Isaac Corporation. Confidential.3

Note: Residential real estate loans include loans secured by one- to four-family properties, including home equity lines of credit.20072005 200920042003

Source: Federal Reserve, Delinquency Rates; 100 Largest Banks, NSA

2006 2008

12-month Performance TrendReal Estate

FICO Score Trends ServiceReal Estate - 12 Month Performance

Customer Management - 60+/Any Derogg y g

70

Oct '05 - Oct '06 Oct '06 - Oct '07 Oct '07 - Oct '08 Apr '08 - Apr '09

40

50

60

te (%

)

10

20

30

Bad

Ra

0

500-5

0952

0-529

540-5

4956

0-569

580-5

8960

0-609

620-6

2964

0-649

660-6

6968

0-689

700-7

0972

0-729

740-7

4976

0-769

780-7

8980

0-900


5 5 5 5 5 6 6 6 6 6 7 7 7 7 7 8

FICO 8 Score

12-month Performance TrendBank Card

FICO Score Trends ServiceBankcard - 12 Month Performance

Customer Management - 60+/Any Derog

80


40506070

Rat

e (%

)

10203040

Bad

R

0

500-5

0952

0-529

540-5

4956

0-569

580-5

8960

0-609

620-6

2964

0-649

660-6

6968

0-689

700-7

0972

0-729

740-7

4976

0-769

780-7

8980

0-900


FICO 8 Score

12-month Performance TrendAuto Finance

FICO Score Trends ServiceAuto Finance - 12 Month Performance

Customer Management - 60+/Any DerogCustomer Management 60 /Any Derog

45


25303540

ate

(%)

5101520

Bad

Ra

0

500-5

0952

0-529

540-5

4956

0-569

580-5

8960

0-609

620-6

2964

0-649

660-6

6968

0-689

700-7

0972

0-729

740-7

4976

0-769

780-7

8980

0-900


FICO 8 Score

Trends Summary

» US population demonstrating higher risk than prior timeframes» Increased risk across score ranges

I d t d t t t k t diti diff tl» Industry products react to market conditions differently

» FICO® Scores continue to rank-order» Odds and distributions are expected to move and shift» Odds and distributions are expected to move and shift» Vary by market conditions and for each lender/portfolio» Validations show consistent rank-ordering across market segments,

time and economic conditionstime and economic conditions

» Look to best practices, especially during times of economic uncertainty


Survive and Thrive

» Today’s challenge: Survive» Manage portfolio risk to mitigate loss while preserving g p g p g

revenue with limited resources» FICO® 8 Score can help identify ‘at-risk’ customers with

greater accuracy to support loss mitigation initiativesgreater accuracy to support loss mitigation initiatives

» Tomorrow’s challenge: Thriveo o o s c a e ge e» Achieve revenue and portfolio growth while limiting loss

and exposure FICO® 8 S h l id tif diff t l l f i k» FICO® 8 Score can help identify different levels of risk to more accurately applying risk-based pricing


Poll question

» For Fiscal Year 2010 is your business strategy focused» For Fiscal Year 2010 is your business strategy focused on:

L id b f i t t ti iti» Loss avoidance by focusing on account management activities

» Opportunity for growth through expanding marketing and origination activitiesorigination activities

» Both of the above activities


Agenda

» Scoring Trendsg






» Benefits & Best Practices



“More Power, Less Pain”

Less PainMore Power

» ‘Plug and Play’ IT requirements» Same score range – 300-850®

Same odds to score relationship

» Enhanced to reflect evolving lending and consumer trends

» Same odds to score relationship » Same reason codes» Same minimum scoring requirements» Same loan shopping inquiry de-dupe

» Up to 15%+ improvement in predictive power

» Same loan shopping inquiry de dupe logic

» Contained score shifts, similar to prior updates

» Refined young/thin file treatment

» Includes patent-pending approach to » Available at all three CRAs

» Access from your bureau of choice

p p g ppevaluating authorized user trades » Continues support of ECOA Reg. B

compliance and substantially reduces impact from tradeline renting abuse


FICO® 8 Score Enhancements

Refined Performance Classification » Trade-level: each profile classified based on “degree” of» Trade-level: each profile classified based on degree of

positive and negative performance for better risk assessment

Enhanced Segmentation Scheme» Includes 2 additional scorecards to better address consumers

with prior blemished credit experiencewith prior blemished credit experience» Other scorecards adjusted to better reflect market trends

Defense Against A thori ed User Ab se &Defense Against Authorized User Abuse & Regulatory Compliance Support

» Refined evaluation of authorized user information to reduce intentional score manipulation


intentional score manipulation

Agenda

» Scoring Trendsg



» Mortgage Account Management

» Bankcard Account Management

» Auto Account Management



FICO Validation Overview

» Recent and extensive validation by FICO:» Recent and extensive validation by FICO:

» Data representing current economic conditions

» Over 9 million US consumers

Validation is October 2006 to October 2008 for 24 month» Validation is October 2006 to October 2008 for 24 month

» Validation is October 2007 to October 2008 for 12 month


“Goods” and “Bads”

Separating the Good from the Bad

Increase revenue with more Avoid losses by identifying more “good” customers Above Cutoff

ICAN

TS

y y g“bads” Below the Cutoff

BADS GOODS

# OF A

PPLI

300 Score Cutoff 850

#


300 Score Cutoff 850

Agenda

» Mortgage Portfoliosg g

» Validation Results and Impact


Mortgage Account Management – Reduce Portfolio Risk

Risky customers – potential actionsy p» Early outreach» Aggressive delinquency treatment» Prioritize for loan remediation» Reduce HELOC


Mortgage Loan Modifications with Short-Term FocusBad Rate Comparison on 12-Month Performance Window

100%

Previous FICO®

FICO® 8 Score vs. Previous FICO® Score Existing Nonprime Mortgages, 12-Month Performance% improvement

80%

90%

3.1% above1.2% below

FICO® 8

Previous FICO4.4% above1.0% below

60%

70%5.0% above3.8% below

6.2% improvement dent

ified

30%

40%

50% above cutoff12.7% improvement

below cutoff

% 9

0+ D

PD

I

10%

20%

30%


0%

Cumulative Lowest Scoring % Consumer Accounts

< 10% < 20% < 30% < 40%

Mortgage – FICO® 8 Example: Nonprime

Mortgage Account Management Loss Avoidance Example:500K account portfolio» 500K account portfolio

» Loss avoidance of $10,000 per account

Accounts Falling Score

Number of Bads

Detected

Number of Bads

DetectedNew Bads

Detected byPercent I LossFalling

BelowScore Cutoff

Detected –FICO 8

Detected –Prior Score

Detected by FICO 8

Improve-ment

Loss Avoidance

40% 610 52,320 51,782 538 1.0% $ 5,376,000 50% 640 56,448 55,680 768 1.4% $ 7,680,00050% 640 56,448 55,680 768 1.4% $ 7,680,000 60% 660 59,520 58,880 640 1.1% $ 6,400,000


Mortgage Account Management – Grow and Retain

» Credit worthy customers – potential actions» Promote attractive refinance options to retain customers» Cross-sell other lending products» Programs for retentiong» Offer HELOC


Mortgage Portfolio Opportunity for GrowthBad Rate Comparison

® ®

100%

FICO® 8 Score vs. Previous FICO® Score Existing Mortgage% improvement

11 2% abo ePrevious FICO®


80%



FICO® 8

Previous FICO

60%

70%

2.9% improvement above cutoff

3.0% improvement below cutoffde

ntifi

ed

30%

40%

50%

% 9

0+ D

PD

I

10%

20%

30%


0%


< 10% < 20% < 30% < 40%

Opportunity for Growth and Retention

Mortgage Account Management Growth Example:f» 300K account portfolio owned

» $5000 in revenue from fees and product cross-sells

AccountsGoods

Above the

Goods Above the Cutoff – New Goods –Accounts

Scoring Above

Score Cutoff

Above the Cutoff –FICO 8

Cutoff Prior Score

New Goods Now Above

CutoffRevenue

Opportunity50% 740 269,010 268,812 198 $ 990,000740 269,010 268,812 198 $ 990,000 40% 760 239,505 239,406 99 $ 495,000


Agenda

» Bankcard Portfolios – Account Managementg



“TowerGroup expects US credit card charge-offs to exceed 10% in 2009 and likely to go higher if revolving balances continue to decline at their current 8% annualized rate. Don’t expect any relief f thi fi i l i til th fi t t 2011 ”from this financial pain until the first quarter 2011.”Dennis Moroney, Research Director The TowerGroup, “Revitalize the Credit

Card Pre-Charge off Collection Process and Improve the Bottom Line”Card Pre Charge off Collection Process and Improve the Bottom Line April 2009


Bankcard Account Management – Reduce Portfolio Risk

Ri k t t ti l tiRisky customers – potential actions» Aggressive delinquency treatment» Strong over-limit collections» Reduce credit line» Close account» Do not reissue» Adjust fees, interest (subject to new legislation)


Improve Account Management for BankcardRiskier Customers: Bad Rate Comparison

® ®

100%

FICO® 8 Score vs. Previous FICO® Score Existing Nonprime Bankcards% improvement

Previous FICO®

80%

90%


FICO® 8

Previous FICO8.3% above2.2% below

60%


3.8% improvement dent

ified

30%

40%


below cutoff

% 9

0+ D

PD

I

10%

20%

30%


0%


< 10% < 20% < 30% < 40%

Bankcard – Example: Riskier Customers

Bankcard – Account Management Loss Avoidance Example:» 1 MM account portfolio

50% h ff t f “b d ” t t i f $5 000 l» 50% charge-off rates for “bads” at average account size of $5,000; only reclaiming 5% of account size ($200)

Number Number of

Bads New Accounts

Falling Below

Score Cutoff

of BadsDetected by FICO 8

Detected by Prior Score

BadsIdentified by FICO 8

% Improve

-mentLoss

Avoidance

50% 620 184,275 180,600 3,675 2.0% $367,500

60% 640 195,300 193,200 2,100 1.1% $210,000


Bankcard Account Management – Areas for Growth

Credit worthy customersy» More flexible over limit strategy» Increase credit line» Reissue for longer periods of time» Reissue for longer periods of time» Cross sell additional products» Offer long-term retention programs


Improve Account Management for BankcardGood Customers: Bad Rate Comparison

® ®

100%

FICO® 8 Score vs. Previous FICO® Score Existing Prime Bankcards% improvement

11.1% above1 7% belowPrevious FICO®


80%

90%1.7% below


5.4% improvement

FICO® 8

Previous FICO

60%


below cutoff

dent

ified

30%

40%

50%

% 9

0+ D

PD

I

10%

20%

30%


0%


< 10% < 20% < 30% < 40%

Bankcard Missed Revenue Example – Prime Accounts

Bankcard - Missed Revenue Opportunity Example» 1 MM account portfolio

R t it f $250 N d t ti t d d» Revenue opportunity of $250 – New product promotions, extendedlines of credit, increased share of wallet

Accounts S i S

Goods Above the C t ff

Goods Above the Cutoff –

P iNew Goods –N Ab RScoring

AboveScore Cutoff

Cutoff –FICO 8

Prior Score

Now Above Cutoff

Revenue Opportunity

70% 690 691,383 690,303 1,080 $ 270,000

60% 710 595,335 594,510 825 $ 206,250


Agenda

» Auto Portfolios – Account Managementg



Account Management – Reduce Portfolio Risk

» Early Outreachy

» Aggressive delinquency treatment» Change Due Date» Extend monthly payments» Waive late fees» Modify terms of loan » Refinance Loan


FICO® 8 Auto Score OffersImproved Auto Loan Management & Securitization

FICO® 8 Auto Score – Redevelopment Results Existing Accounts – Auto Finance% improvement

100%Current FICO® Industry Score FICO® 8 Industry Score

7 8% above

10.1% above 1.6% below

80%

D Id

entif

ied

8 3% b

7.8% above 2.6% below

60%

% 9

0+ D

PD 8.3% above 7.8% below

40%

%

<10% <20% <30%Cumulative Lowest Scoring % Accounts


Cumulative Lowest Scoring % Accounts

Data provided by TransUnion, Analysis conducted by FICO

FICO® 8 Auto Example: Account Management

» Auto Loan Account Management – Proactive loan modification improved collections» 200K account portfoliop» Average repossession, loss of $8,000*» Prevent 35% of additional charge-offs

Accounts Scoring B l S

Number of Charge-

offs Detected –

FICO 8

Number of Charge-

offs Detected –P i A t

Additional Charge-

offs Identified b FICO 8

% I

35% Additional

Ch ff LBelow Cutoff

Score Cutoff

FICO 8 Auto

Prior Auto Score

by FICO 8 Auto

Improve-ment

Charge-offs prevented

Loss Avoidance

22% 620 8,713 8,358 355 4.25% 124 $992,000

28% 640 9,682 9,376 307 3.27% 107 $856,000

34% 660 10,562 10,307 256 2.48% 90 $720,000

41% 680 11 289 11 146 143 1 29% 50 $400 000


41% 680 11,289 11,146 143 1.29% 50 $400,000

Data provided by TransUnion, Analysis conducted by FICO – Based on April 2005-2007 Development Data

Agenda» Market & Scoring Trends








Transitioning to the FICO® 8 Score

» Identify all score use» Embedded in other models» Utilized in collections operation» Built into other decisioning matrices

Deals alread e tended» Deals already extended» Tracking

» Understand what drives your cut-offs» Understand what drives your cut offs» Risk driven considerations

• Volumes above and below that cutoff may change» Volume driven considerations» Volume driven considerations

• Score cutoffs may need to be adjusted to maintain those rates• Lowering cutoffs to meet an expected acceptance rate could

result in increased risk


» Combined risk and volume considerations

FICO® 8 Score – Transition Planning

» You may observe distribution changes» Most consumers will score within +/-30 points between versions

» Validate performance at a given score range based on your customer performancecustomer performance

» You may request archive scores from your credit bureau to evaluate anticipated volume shifts

» Test and incrementally adjust cutoffs to gauge the impact from such actions

READY TO GET STARTED? Call your Credit Bureau representative today


Call your Credit Bureau representative today

Questions?Questions?


THANK YOUTHANK YOU

To gain a competitive edge with FICO® 8 please:E il i f @fiEmail: [email protected] Call: 800-777-2066

Let’s continue the discussion:FICO® Scoring Communityhttp://decisions.fico.comhttp://decisions.fico.com

Confidential. This presentation is provided for the recipient only and cannot be reproduced or shared without Fair Isaac Corporation's express consent.

© 2009 Fair Isaac Corporation. 39

AppendixAppendix


Authorized User (AU) TradelinesRefined Evaluation

» Problem – Credit repair authorized user ‘piggybacking’ -artificially increases credit scores » Not identifiable from credit report information» Not identifiable from credit report information

» Challenge – Lender/Regulator concerns re: ECOA Reg. B compliance

L d t id AU t d f» Lenders must consider AU trades of spouses» Many rely on FICO® scores to help meet this requirement» If not in scores, lenders must consider outside of scoring systems

» Solution – Patent-pending approach for evaluating AU tradelines» Supports lenders continued reliance on FICO® scores to help meet

compliance requirementscompliance requirements» Considers AU information based on predictive value relative to

‘owned’ trades» Limits potential for ‘abuse’


» Limits potential for abuse» No additional implementation requirements

Refined Performance Classification» Report-level (Current FICO® Scores): Both profiles classified as equivalent “bads”

» Trade-level (FICO® 8 Scores): Each profile classified differently based on “degree” of positive and negative performance


FICO® 8 Score SegmentationEnhanced Core System

Presence ofPresence of

CREDIT BUREAU FILE

No Yes

Presence ofSerious Delinquency /

Derogatory Items ?


Derogatory Items ?

8 Non-Derogatory8 Non-Derogatory 4 Derogatory4 Derogatory8 Non-DerogatoryScorecards

8 Non-DerogatoryScorecards

4 DerogatoryScorecards

4 DerogatoryScorecards

Thickness of fileAge of file

87

6

Public recordWorst rating

43

21

Age of fileRecency of new openingsMild delinquency

65

43

21

Return FinalFICO® 8Return Final

FICO® 8 Return FinalReturn Final

1


FICO® 8 score(no change)

FICO® 8 score(no change)

Return FinalFICO® 8 scoreReturn Final

FICO® 8 score

FICO® 8 Score Industry ScoresPerformance Boost for Auto and Bankcard Lending

BASE FICO® 08 ScoreBASE FICO® 08 Score» Separate systems:» Auto

Presence ofPresence of

» Auto» Bankcard

No Yes


Derogatory Items ?


Derogatory Items ?

Non DerogatoryNon Derogatory DerogatoryDerogatoryNon-DerogatoryScorecard

Non-DerogatoryScorecard

DerogatoryScorecardDerogatoryScorecard

Return FinalReturn Final Return FinalReturn Final


Return FinalFICO® 8

Industry Score


Industry Score


Industry Score


Industry Score

FICO 8 Score: Get the Benefits Now!Note: Residential real estate loans include loans secured by one...

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Transcript of FICO 8 Score: Get the Benefits Now!Note: Residential real estate loans include loans secured by one...