quarterly survey

Consumer Credit Risk –
North America Trends and Expectations
SECOND QUARTER 2014
A Survey by the
Professional Risk
Managers’ International
Association
July 2014
w w w. P R M I A . o r g
PRMIA thanks our survey sponsor
FICO
TM
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ACKNOWLEDGEMENTS
The Professional Risk Managers’ International
Association (PRMIA) is a higher standard for
risk professionals, with 65 chapters worldwide.
A non-profit, member-led association, PRMIA
is dedicated to defining and implementing the
best practices of risk management through education, including the Professional Risk
Manager (PRM) designation and Associate PRM certificate; webinar, online, classroom
and in-house training; events; networking; and online resources. More information can
be found at www.PRMIA.org.
FICO
TM
FICO (NYSE:FICO) delivers superior predictive analytics
that drive smarter decisions. The company’s groundbreaking
use of mathematics to predict consumer behavior has
transformed entire industries and revolutionized the way risk is managed and products
are marketed. FICO’s innovative solutions include the FICO® Score — the standard
measure of consumer credit risk in the United States — along with industry-leading
solutions for managing credit accounts, identifying and minimizing the impact of fraud,
and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks,
as well as leading insurers, retailers, pharma businesses and government agencies rely
on FICO solutions to accelerate growth, control risk, boost profits, and meet regulatory
and competitive demands. FICO also helps millions of individuals manage their personal
credit health through www.myFICO.com. FICO: Make every decision count.
PRMIA would like to extend
special appreciation to The
Center for Decision Sciences
at Columbia Business School for their assistance in analyzing the survey responses. The
Center for Decision Sciences brings together scholars from a range of fields who share
an interest in human decision making. The center facilitates research and understanding
on consumer behavior, the implications of decision making on public policy, and the
neurological underpinnings of judgment and decision making. The center is housed
within Columbia Business School, widely acknowledged as being among the world’s top
business schools. To learn more, visit http://decisionsciences.columbia.edu.
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EXECUTIVE SUMMARY
S
ince the first quarter of 2010, FICO and PRMIA have polled bank risk
professionals each quarter regarding their predictions for the next six
months and the impact of current events on their field.
This quarter shows consistency with previous quarters; however, it also
further highlights a growing uncertainty when it comes to consumers’ use of
credit. Predictions support the view that over the next six months consumers
will request and utilize higher amounts of credit. However, this has some risk
managers worried that delinquency levels may be affected. While this doesn’t
appear true in terms of mortgage and refinancing predictions, areas such as credit
cards seem to be a source of concern to respondents. Additionally, student loan
delinquency remains a concern for the majority of the respondents surveyed.
Key findings and predictions about the next six months:
■
■
■
■
■
■
■
■
■
Only 6.4% of respondents look for levels of student loan delinquencies to drop,
a historic low.
Most respondents (50.5%) feel that the level of auto loan delinquencies will
remain the same.
Similarly, most respondents (51.7%) feel that the level of small business loan
delinquencies will stay the same.
Most (63%) feel that the average balance on credit card accounts will increase.
Most (59.3%) also believe that the aggregate amount of credit requested by
consumers will increase.
A majority (50.5%) feel that the total number of delinquencies will stay the
same.
Two-thirds (67.5%) feel that the aggregate amount of credit requested by small
businesses will increase.
A plurality of respondents feel that, within each type of loan surveyed, the
supply will meet demand over the next six months.
The majority of bankers polled (58.8%) cite a high debt-to-income ratio as the
factor that would make them most hesitant to approve a consumer loan.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y D E TA I L S
KEY FINDINGS AND ANALYSIS
Delinquencies Stable, With Some Concerns Over Credit Cards & Student Loans
Looking at the industry as a whole, over the next six months,
do you expect: (check all that apply)
The level of residential mortgage
delinquencies (of 90 days or more) to
The level of home equity
line delinquencies to
The level of credit card delinquencies to
The level of auto loan delinquencies to
The level of small business
loan delinquencies to
(As a general guideline, the SBA Office
of Advocacy defines a small business
as an independent business having
fewer than 500 employees.)
The level of student loan
delinquencies to
0%
10%
20%
30%
40%
Increase significantly
Increase somewhat
Stay about the same
Decrease somewhat
Decrease significantly
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T H E P R O F E S S I O N A L R I S K M A N A G E R S ’ I N T E R N AT I O N A L A S S O C I AT I O N
50%
60%
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S U R V E Y D E TA I L S
In Q2 2014, the FICO/PRMIA survey found a pattern of results that suggests a stable
outlook for the next 6 months, with two notable trends that may be areas of interest
in the future.
Looking at residential mortgages, many (48.5%, up 4% from last quarter) believe that
the level of residential mortgage delinquencies will stay the same, a consistent belief
in previous quarters as well. In home equity lines of credit, a near majority (49.8, up
2.5% from Q4 2013) also believe that we will continue to see the same levels of delinquencies. Credit card debt, however, appears to follow a trend first noticed in Q1,
with nearly half (43.3%, nearly unchanged from last quarter) expecting the level of
credit card delinquencies to increase, while 38.9% expect levels to remain the same.
This is the second time in recent quarters that predictions of increase have outweighed status quo in this category, suggesting sentiment is starting to shift toward
one of caution in regards to credit card debt.
Looking at auto loan delinquencies, the majority of respondents felt that the level of
delinquencies would either stay the same or decrease (69.3%, up from 64.8% in Q1).
Finally, most respondents (51.7%, up 6.4% from Q1) believe that the level of small
business loan delinquencies will stay the same, with slightly more looking for an
increase (26.4%) than a decrease (21.9%). Finally, in a trend present over several
quarters, a majority (51%) predict that the level of student loan delinquencies will
increase over the next six months. In an historic low for the survey, only 6.4% look
for levels of student loan delinquencies to drop over the next six months.
While most delinquency categories appear to speak to stability, the recurring threat of
student loan delinquencies and possibilities of credit card delinquencies remain of
interest to the risk managers surveyed.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y D E TA I L S
Consumer Credit Outlook:
Consumers are Going to Carry a Higher Balance – Unknown Consequences
Looking at the industry as a whole, over the next six months,
do you expect: (check all that apply)
Interest rates for
consumer credit to
The approval criteria for common
credit and loan products to
The average balance on
credit card accounts to
The volume of credit/
loan applications to
The aggregate amount of credit
requested by consumers to
The approval rate of credit/
loan applications to
The amount of consumer
credit extended by lenders to
0%
10%
20%
30%
40%
50%
Increase significantly
Increase somewhat
Stay about the same
Decrease somewhat
Decrease significantly
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T H E P R O F E S S I O N A L R I S K M A N A G E R S ’ I N T E R N AT I O N A L A S S O C I AT I O N
60%
70%
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S U R V E Y D E TA I L S
Reviewing the outlook on consumer credit, respondents seem to favor previous
sentiment reported in past quarters. For example, in Q4 2013, 52.4% expected that
interest rates on consumer credit would increase. Last quarter this number went up
slightly to 57.3%, and this quarter it returns to a slim majority (51%). Many (49.2%,
up from 43.4% last quarter) expect the approval criteria for credit and loan products
to stay the same, and a majority (63%, down 2% from Q1) look for consumers to
carry a higher average balance on their credit cards (with only 6.8% expecting a
decrease in average balance). Additionally, 47.6% see the volume of credit/loan
applications rising, while a majority (59.3%) also predict the aggregate amount of
credit requested to increase. Sentiment seems to be the same as in Q1, namely to
wait and see. Rates will likely go up somewhat; average balances and amount of
credit requested will go up as well. This may also be related to the predictions
above possible increases in credit card delinquency.
Additional predictions in consumer credit show many (44.3%, up from 40.2% in
Q1) feel that the approval rate for consumer credit and loans will remain the same,
and respondents continue to appear split on the question of the amount of consumer credit that will be extended by lenders: 45.4% believe this amount will
increase, while 41.2% believe it will stay the same. This split is virtually unchanged
from the sentiment reported in Q1. In sum, the predictions of the next six months
show an attitude of uncertainty regarding consumer credit usage and need, but do
not appear alarming.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y D E TA I L S
Consumers Asking for More Credit,
Not Likely to Lead to Larger Number of Delinquencies
Looking at the industry as a whole, over the next six months, do you expect:
Increase significantly
The number of existing
customers who request
credit-line increases to
Increase somewhat
Remain the same
Decrease somewhat
The total number of delinquencies
(of 90 days or more) on consumer
lending products to
Decrease significantly
The number of new delinquencies
(of 30 days or more) on consumer
lending products to
0%
10%
20%
30%
40%
50%
60%
This quarter’s FICO/PRMIA survey finds 53.6% (down from 54.7% in Q1) predicting that
the number of existing customers who will request credit-line increases will rise, with a
smaller amount (42.3%) predicting levels will remain the same. At the same time, a small
majority (50.5%, in both this quarter and Q1) predict the total number of delinquencies
will stay the same – smaller than the 51.3% in Q4 2013, and the 62.3% in Q3 2013. Finally,
a near majority (49.5%, up nearly 5%) believe that the number of new delinquencies will
remain the same.
Overall, the numbers suggest consumers will be asking for more credit, with the majority
believing that the total number of delinquencies will stay the same. One suspects that the
predictions of increased delinquencies in credit card debt do not factor heavily in the
majority of respondents’ beliefs regarding overall delinquency rates.
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S U R V E Y D E TA I L S
Small Business Outlook Is Stable and Historically Consistent
Looking at the industry as a whole, over the next six months, do you expect:
The aggregate amount of credit
requested by small businesses to
The approval rate of credit/loan
applications from small businesses to
The amount of credit extended
to small business by lenders to
0%
10%
20%
30%
40%
50%
60%
70%
Increase significantly
Increase somewhat
Remain the same
Decrease somewhat
Decrease significantly
Previous FICO/PRMIA surveys have shown increased optimism regarding small businesses’
use of credit, and the present survey appears to continue this trend (the opposite of Q1,
where predictions were more tempered). A large majority (67.7%) predict that the amount
of credit requested by small businesses will increase. Approval rates, throughout last year
predicted to remain stable, are expected by many (45%) to stay the same, and many
(43.9%) believe that the amount of credit extended to small businesses will increase
over the next six months. Overall, the picture of small business lending over the past year
continues to be one of optimism with a status-quo lean — large shifts in behavior not
predicted. There appears to be little expectation for negative trends in small business
lending — less credit requests, lower approval rates, and lower amounts of credit
extended. This is a good sign for small businesses.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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S U R V E Y D E TA I L S
Current Topics:
Credit Supply and Another Bubble?
Over the next six months, do you expect
The supply of credit for
residential mortgages to
The supply of credit for
mortgage refinancing to
The supply of credit
for credit cards to
The supply of credit
for auto loans to
The supply of credit for
small business loans to
The supply of credit for
student loans to
0%
10%
20%
30%
40%
50%
60%
70%
Fall significantly short of demand
Slightly exceed demand
Fall slightly short of demand
Significantly exceed demand
Meet demand
The FICO/PRMIA survey devotes a number of questions each quarter toward current
topics. Beginning in Q3 2012, credit supply became a major focus of the current topics
section, broken out by multiple categories. In four of the six categories polled (supply of
credit for credit cards, auto loans, and student loans), a majority of respondents felt that
supply would meet demand (with this prediction most favored in the auto loan category,
with 62.3%). In two other categories (supply of credit for mortgage refinancing and initial
residential mortgages), a plurality of respondents felt supply would meet demand.
However somewhat concerning is that, similar to last quarter, 39% believe that the supply
of credit for residential mortgages will fall slightly or significantly short of demand, a
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S U R V E Y D E TA I L S
surprising trend this quarter (albeit slightly down from 43.7% reported in Q1). This
suggests that, while supply and demand have been closely matched in the marketplace
up to this point, two respondent pools now have predicted the possibility of a deficit for
large lump-sum purchases versus smaller amounts of debt. In contrast, only 21.4%
believe that supply of credit for consumer credit cards will fall below demand.
If you are involved with residential mortgage lending, on a scale of 1-10,
how concerned are you that an unsustainable real estate bubble is inflating?
1 representing not concerned at all and 10 represents extremely concerned.
5.4%
1
2
4.8%
Scale from 1 to 10
3
8.8%
10.9%
4
5
13.6%
19.7%
6
15.6%
7
16.3%
8
9
1.4%
3.4%
10
5
10
15
20
25
30
Number of respondents
This quarter the FICO/PRMIA survey also asked risk managers involved in residential
mortgage lending to forecast how concerned they were that an unsustainable real estate
bubble is inflating (on a scale of 1-10, with 1 being not concerned, and 10 being extremely
concerned). The modal response was a 6 (with 19.7%), with a little over a third (36.7%)
rating a 7 or higher. With only a third (29.9%) rating their concern at a 4 or less, this
suggests that the possibility of a bubble is in the minds of many, likely due to the fact that
we are still dealing with the effects of the previous bubble. Risk managers remain vigilant
in looking for signs of a bubble, with many appearing to already see some signs of it.
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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The OCC and other agencies have noted growing risk as
it relates to the HELOC end-of-draw issue (i.e., recasting).
How concerned is your institution about this issue?
1.6%
14.8%
29.5%
Not concerned
Somewhat concerned
Concerned
54.1%
Turning from outlook to current practice,
the FICO/PRMIA survey this quarter
asked risk managers what factor on a
loan application would make them most
hesitant to approve the loan. A majority
of respondents (58.5%) cited a high
debt-to-income ratio. Lesser red flags
included multiple recent applications
for credit (12.6% report this as most
disconcerting), a low FICO score
(10.4%), frequent job changes in
employment history (9.3%), and
finally a lack of savings (8.8%).
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Very concerned
Which of the following would make you most hesitant
to approve a loan if you were to see it on a consumer
loan application?
12.6%
10.4%
High debt-to-income ratio
8.8%
Frequent job changes in the
applicant’s employment hist
Lack of savings
9.3%
T H E P R O F E S S I O N A L R I S K M A N A G E R S ’ I N T E R N AT I O N A L A S S O C I AT I O N
58.8%
Multiple recent applications
Low FICO Score
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Historical Analysis
Over 17 quarters, a variety of
trends have been noted by the
FICO/PRMIA survey. As with last
quarter, the analysis this quarter
does not appear to be significantly
affected on any one item to an
historic high or low. Nonetheless,
various elements are present in
the data, such as:
■
Across the tracked questions,
there was one historic low: Only
6.4% of respondents predict a
decrease in student loan delinquencies. The second lowest,
6.9% was reported in Q2 2012.
At one point, in Q3 2010,
33.3% expected a drop.
Mortgage Delinquencies
46.9%
48%
46%
44%
42%
40%
38%
38.5%
36%
34%
31.2%
32%
28%
26%
28.1%
26%
■
Only 6.8% of respondents
expect a decrease in the average
balance of credit card accounts,
the second lowest point on
record (in Q3 2013, 6.5%
predicted a decrease).
Similarly, only 4.1% expect a
decrease in requests for credit
line increases, near the record
low of 3.5% observed in Q2
2013.
26.9%
24%
22%
22.8%
20%
18.1% 18.3%
18%
12%
14.8%
15.1%
13.4%
16%
14%
■
12.7%
10%
10%
0%
Q2 2010
Q4 2010
Q3 2010
Q2 2011
Q1 2011
Q2 2012
Q4 2011
Q1 2012
Q3 2011
Q4 2012
Q3 2012
Approximately 5% more respondents now favor a decrease in
total number of delinquencies
compared to Q1. This was one
of the categories with the most
difference between Q1 and Q2,
suggesting similarity between
both quarters on most of the
historically tracked measures.
Q2 2013
Q1 2013
Q4 2013
Q3 2013
Q2 2014
Q1 2014
Mortgage delinquencies – percent of respondents expecting a decline
Home Equity Delinquencies
40.6%
42%
40%
38%
36%
■
30.4%
28.8%
31.3%
30%
36%
34%
32%
30%
29.7%
29.4%
28%
27%
26%
27%
24%
20.9%
22%
24.7%
23.1%
22.2%
23.9%
23.2%
20%
18%
17.5%
16%
18%
16.4%
16.2%
14%
12%
10%
10%
0%
Q2 2010
Q4 2010
Q3 2010
Q2 2011
Q1 2011
Q4 2011
Q3 2011
Q2 2012
Q1 2012
Q4 2012
Q3 2012
Q2 2013
Q1 2013
Q4 2013
Q3 2013
Q2 2014
Q1 2014
Home equity deliquencies – percent of respondents expecting a decline
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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Credit Card Delinquencies
40%
36.3%
35%
31.4%
30%
25%
23.4%
27.1%
22.8%
28.3%
23.3%
25.3%
20.7%
20%
29.7%
27.7%
26.9%
22.8%
21.3%
19.4%
15%
10%
17.7%
9.1%
5%
0%
Q2 2010
Q4 2010
Q3 2010
Q1 2012
Q3 2011
Q4 2012
Q2 2012
Q4 2011
Q2 2011
Q1 2011
Q3 2012
Q2 2013
Q1 2013
Q4 2013
Q3 2013
Q2 2014
Q1 2014
Credit card delinquencies – percent of respondents expecting a decline
Student Loan Delinquencies
18%
15.4%
16%
13.3%
14%
14.5%
12.8% 12.4%
12.7%
11.3%
12%
10%
9.2%
8%
7.6%
12.3%
12%
11.6%
9.1%
8.5%
8.3%
6.9%
6%
6.4%
4%
2%
0%
Q2 2010
Q4 2010
Q3 2010
Q2 2011
Q1 2011
Q4 2012
Q2 2012
Q4 2011
Q1 2012
Q3 2011
Q3 2012
Q4 2013
Q2 2013
Q1 2013
Q2 2014
Q1 2014
Q3 2013
Student loan delinquencies – percent of respondents expecting a decline
Total Loan Delinquencies
35%
29.3%
30%
25.2%
25%
20%
17.5%
23.7% 24.1%
20.1%
20.8%
15%
18%
18.1%
17.7%
20.9%
17.5%
18.8%
16.3%
10%
11.3%
12.8%
5%
0%
Q2 2010
Q4 2010
Q3 2010
Q2 2011
Q1 2011
Q4 2011
Q3 2011
Q2 2012
Q1 2012
Q4 2012
Q3 2012
Q2 2013
Q1 2013
Total number of delinquencies – percent of respondents expecting a decline
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Q4 2013
Q3 2013
Q2 2014
Q1 2014
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Auto Loan Delinquencies
40%
37.2%
34.4%
35%
32.1%
32.2%
30.4%
28%
30%
25.4%
24%
25%
21.1%
22.4%
20%
15%
25.3%
22.9%
25%
21.9%
22.9%
18.8%
15.4%
10%
5%
0%
Q2 2010
Q4 2010
Q3 2010
Q1 2012
Q3 2011
Q4 2012
Q2 2012
Q4 2011
Q2 2011
Q1 2011
Q3 2012
Q2 2014
Q4 2013
Q2 2013
Q1 2014
Q3 2013
Q1 2013
Auto loan delinquencies – percent of respondents expecting a decline
Small Business Loan Delinquencies
40%
36.2%
35%
30%
30%
29.9%
28.1%
25%
20%
26.3%
18.5%
25.8%
21.9%
25%
20.5% 23.7%
20.6%
15%
10%
27.4%
26.5%
20.5%
16.6%
11.5%
5%
0%
Q2 2010
Q4 2010
Q3 2010
Q2 2011
Q1 2011
Q4 2011
Q3 2011
Q2 2012
Q1 2012
Q4 2012
Q3 2012
Q4 2013
Q2 2013
Q1 2013
Q3 2013
Q2 2014
Q1 2014
Small business loan delinquencies – percent of respondents expecting a decline
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
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RESPONDENT PROFILE
Your job (select most appropriate)
34.6%
37.3%
Chief Risk Officer
Functional leader
Portfolio/product management
Business/risk analyst
Other
5.9%
13%
9.2%
Many respondents (37.3%) identified as business or risk analysts, down about 3% from last
quarter. Smaller percentages of respondents identified as functional leaders (9.2%), portfolio or
product managers (13.0%) or Chief Risk Officers (5.9%). Slightly over a third of respondents,
34.6%, indicated that their most appropriate job was not listed, indicating that they engaged in
roles that did not neatly fit traditional job titles.
What is your area of responsibility (check all that apply)?
60%
54.7%
50.9%
Card portfolio
50%
Mortgage portfolio
40%
Direct deposit accounts
Auto loan portfolio
34.9%
Lines of credit
30%
22.6%
Student loans
20.8%
20%
14.2%
10%
0%
Respondents were allowed to indicate all areas of risk that they participate in or are responsible
for. Similar to previous surveys, most respondents (54.7.9%) were involved in managing lines of
credit, with fewer numbers responsible for mortgage portfolios (50.9%), card portfolios (34.9%),
Auto loan portfolios (22.6%), and direct deposit accounts (20.8%). As respondents were allowed
to select as many areas as they felt they had responsibility over, it is interesting to find that most
respondents (over half) selected multiple areas, a trend observed in larger numbers each quarter.
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T H E P R O F E S S I O N A L R I S K M A N A G E R S ’ I N T E R N AT I O N A L A S S O C I AT I O N
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What is the business orientation of your
institution (select the most appropriate)?
What is the size of your
institution (by total assets)?
3.7% 1.2%
9.5%
5.5%
4.9%
9%
29%
9%
49.7%
35%
43.5%
Wealth management, investments, retirement services
Up to $5 billion
Full service bank
$5 – $10 billion
Discount and/or self-serve financial services
$10 – $20 billion
Mortgage Lender
$20 – $40 billion
Credit union
$40 + billion
Credit card monoline
Nearly half (49.7%) of respondents worked in wealth management, investments, or retirement
services. Also represented, a third of respondents (35.0%) worked in a full service bank. Smaller
percentages reported working at credit unions, mortgage lenders, and discount/self-serve financial
services. These orientation breakdowns are remarkably similar to previous quarter’s data. By assets
managed, the respondent pool contained slightly more smaller institutions (up to $5 billion in
assets, 39.2%) than larger ($40+ billion, 26.0%).
What is the geographic reach of your institution?
Most respondents were based
in the United States (65.8%)
with the remaining 34.2% based
in Canada. Nearly half worked
at a firm with global (49.4%)
reach. Also represented in
smaller numbers were those at
institutions with national
(23.3%), regional (17% of
respondents) and local (8% of
respondents) reach.
United States
34.2%
Canada
65.8%
23.3%
Global
National
49.4%
Regional
Local
17%
Internet-based
8%
2.3%
A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S
17
FICO
TM
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