Analytics to Prep for Economic Uncertainties

As lenders—like the general public—struggle to understand what’s ahead in terms of economic recovery, they are looking to find new ways to help them judge what their credit risk policy should be when it comes to qualifying borrowers for REO properties. Equifax and FICO have partnered to help lenders get some clarity on this very pressing concern.

Specifically, Equifax Inc. and FICO have launched a new analytic solution to help lenders better anticipate account and portfolio risk in light of shifting economic events. FICO Economic Impact Index provides lenders with insights for portfolio stress testing, enabling them to adjust their risk management policies and decision strategies. “We’re giving lenders a mechanism to enhance their strategy and take it to the next level by including macroeconomic risk in their risk assessment,” said Careen Foster, director at FICO. “This is a new innovation that links economic changes in the future with current risk. This will help lenders better understand risk”

Developed by FICO and initially available on an exclusive basis from Equifax, FICO Economic Impact Index helps lenders understand how future economic fluctuations can affect Beacon 09 (FICO 8) credit scores. Leveraging Equifax’s data assets, the solution helps lenders assess the potential impact of various economic scenarios on the repayment risk levels related to FICO 8 scores.

The tool provides lenders with the ability to select one or more anticipated economic scenarios to project the expected risk (and associated loss) under different economic conditions. This tool adjusts the FICO 8 score offered with Equifax to include economic conditions. Economic forecasting within the offering is updated quarterly and driven by driven by Moody’s Analytics Inc.

Mike Harvey, vice president of strategic alliances at Equifax, added, “In this case we provide FICO with the necessary data to combine economic forecasting with traditional credit scoring. “On a strategic level, customers want to use this to do economic analysis to use in portfolio management and credit risk tolerance. We also refresh the economic score every three months. Usually a score is not refreshed that often. Every time a refresh happens the customer gets six new options to choose from to improve profitability and portfolio analysis.”

In detailing the overall industry significance of what this FICO/Equifax joint venture brings to the table, analyst Bobbie Britting, research director for consumer lending at TowerGroup, says, “Lenders continue to evaluate the best means to manage their portfolios through difficult times. Economic data has always been a consideration in the lending world, but today’s informational needs are much more complicated. As consumer behavior changes and diverges, anticipating and understanding the underlying economic conditions has become much more important for lenders.”

The offering translates market direction into actionable customer decisions and anticipates actual portfolio performance. In an improving market the lender will be able grow their portfolio and capture market share. Conversely, in a down market the offering will help the lender improve losses and refine capital requirements.

“Lenders are struggling with deciding exactly when to tighten their credit criteria,” said Foster. “They don’t want to capture too much risk. As the market hits bottom you also want to loosen criteria so you don’t leave money on the table. We’re not saying we can get rid of economic shock, but we do want to minimize it.”