Navigating with Confidence Under the Umbrella of Economic Uncertainty
The following blog post is from LexisNexis Risk Solutions as an add-on to their recent Extra Credit Podcast episode with Solomon Semere, Senior Director, Credit and Marketing Strategy and Craig Stockum, Sales Director.
Historically, the financial market has been able to rely on cyclical demand with a level of predictability in forecasting origination volumes. However, from the onset of the pandemic, the market saw depressed demand across financial product. This ultimately resulted in pent up demand that led to a strong market in the start of 2021 for the auto and mortgage industry but the continued uncertainty in the financial landscape has produced new challenges for lenders that use traditional data sources and strategies to assess consumer risk.
Increasingly, we have seen diverging trends across industries and credit segments with respect to how consumers are seeking and engaging with financial products.1 At the same time, credit quality is at an all-time high2 and credit utilization is at near record lows because of government forbearance programs.3 Despite these positive signs, hidden risk — not readily apparent with traditional credit data — may be just around the corner. What do lenders need to do to adjust their strategy to meet customers where they are while mitigating risk?
- Recognize that demand for new banking products (like credit cards and demand deposit accounts) is on the rise, driven by subprime and credit invisible consumers who typically lack a traditional credit score. Banking application activity in these two segments has risen by 60% and 40% respectively since January 2020.4
- Understand that auto sales and financing activity, which soared across all credit tiers with stimulus checks in Q1, is now slowing. Ongoing supply chain issues have driven up the cost of automobiles, particularly in the used market, have begun to price subprime and credit invisibles out, with both populations seeing >30% reductions in loan applications since January 2020.5
- Be aware of greater residential instability. When comparing the pre- and post-pandemic time periods, we’ve seen a 40% drop in consumers moving or changing addresses within a 12-month period, 6 largely because of the eviction moratorium and mortgage forbearance. With the removal of government protections, greater instability is expected, which can correlate to higher credit risk.
Even though the mortgage and automotive industries have seen significant year-over-year growth, automotive sales levels remain below pre-pandemic levels and both industries are anticipating further market contractions that will require lenders to be more competitive to maintain or grow their portfolios.7,8 So, how can lenders be smarter and faster in their credit decision process to achieve desired growth without compromising their risk standards?
Drive consumer engagement while being mindful of risk pitfalls.
Lenders need to look at the evolving financial landscape through a new lens — particularly as younger consumers, who are just establishing credit, embrace the ease, speed and convenience of online lending. The ability to better decipher between likely profitable and risky consumers at this point is pivotal and needs to encompass a wider scope than just repayment history, bankcard utilization or 30-day delinquencies.
If credit profiles are so muddy and confused and traditional data is not giving you what you need to properly evaluate risk, then what is the answer? Traditional credit data will continue to be important, but ideally, it should be supplemented with alternative data — defined as data that is outside the scope of traditional credit reports.
Alternative data models strike right to the core of a consumer’s upward or downward financial trajectory by considering behavioral predicators such as education history, address stability, professional licenses, asset ownership and more. Not only do alternative scores help identify promising credit-invisible applicants and fuel financial inclusion strategies, but they also reveal prime applicants who are struggling. By using a broader, more holistic view of data, you gain a more accurate picture of opportunity and risk.
Interested in learning about alternative data and the role it can play in credit assessment? Visit risk.lexisnexis.com/creditrisk to learn more.
- LexisNexis Risk Solutions InfoHub, August 2021, Assessment of application demand for automotive financing and banking products.
- https://www.cnbc.com/select/average-fico-score-hits-record-high-in-2020/#:~:text=The%20average%20FICO%20Score%20in,Experian%27s%202020%20Consumer%20Credit%20Review.
- https://www.consumerfinance.gov/about-us/blog/credit-card-use-still-declining-compared-to-pre-pandemic-levels/
- LexisNexis Risk Solutions InfoHub, August 2021, Based on application volume across sub-prime and credit invisible populations.
- LexisNexis Risk Solutions InfoHub, August 2021, Assessment of application demand for automotive financing across credit segments.
- LexisNexis Risk Solutions InfoHub, August 2021, Based on address change data when compared to 2020 data.
- https://www.mba.org/2021-press-releases/october/mba-annual-forecast-purchase-originations-to-increase-9-percent-to-record-173-trillion-in-2022
- https://www.coxautoinc.com/news/cox-automotive-u-s-auto-sales-forecast-september-2021/
November 17th, 2021
