Credit Risk Management
We live in the world of data now; data allows us to make realistic decisions about the future. No risk department or data science team can claim to have completed its work unless they have completely understood the source of their credit risk. MaxDecisions, Inc helps clients identity the true source of First and Early Payment Default and long term credit risk.
Smart lenders understand that customer acquisition, fraud and credit risk are all interrelated. MaxDecisions help our clients to manage risk as much upstream as possible to eliminate downstream credit risk.
MaxDecisions – we are passionate when it comes to help our clients to lower first, early and credit risk issues. We combine our knowledge in customer acquisitions and design custom solutions that maximizes conversion and minimizes risk.
Credit Risk Success Circle
- Fraud Prevention
- First Payment Default
- Early Payment Default
Fraud, First Payment Default and Early Payment Default needs to be controlled and constantly monitored to ensure profitability.
For clients with longer term product beyond 2 years of servicing. We also advise our clients on prepayment speed. On one hand, a prepaid loan is by definition not a defaulted loan, however a fast prepayment speed could hurt your profitability especially when our clients offers incentive programs.
- Higher FICO scoring population generally prepays faster
- 0.5-1% prepayment speed per month is generally acceptable
- Prepayment speed exceeds 2% per month needs investigation
- Prepayment penalties are not legal
Credit risk management controls
Credit cut off rules are common place with many of our clients, whether it’s policy or product design driven. We always recommend a set of ”knock-out” rules to cut out population with the highest default probabilities. An initial set of rules is a great approach at reducing additional underwriting cost and provide control for early payment defaults.
We find that custom risk models are just a component of our client’s overall credit risk management strategy. Although we have built many credit risk models, model stability reporting/monitoring and model recalibration is also a key to our client’s success.
We always recommend to our clients to lay out a strategy with a FPD Model in conjunction with an EPD model. They are used to control for overall credit risk and pricing.
MaxDecisions, Inc. will train these models to differentiate payment default behaviors. An EPD model could be defined as targeting the “any 2 consecutive missed payments in the first 6 payments”.
Roll Rate Analysis is a critical component for us to identity EPD behaviors. Transitional Matrix within the roll rate analysis is the most critical part in detecting potential collection and underwriting issues.
Credit Risk Management
Credit risk remains the single biggest issue amongst our clients. Credit risk or defaults could be caused by various reasons such as customer acquisition channels, pricing, terms and amount of the credit offered. It could also be ineffective underwriting data, rules and models. Here are some quick reason on effectively managing your credit risk:
- “Credit Risk Management – What is it and why it matters“ – SAS
- “Credit Risk Management for Small Businesses” – Experian
- “Credit Risk Predictive Modeling and Credit Scoring” – Rosella
- “Credit Scores: Everyday Predictive Analytics“ – Forbes
- “A Predictive Analytics Primer” – Harvard Business School