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Private loan underwriting……...
Understanding how lenders weigh the risks
Ben Brudnock
Vice President
Education Finance
Citizens Bank
Session topics
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Types of Consumer Loans
Impact of recession on credit underwriting
Underwriting basics
Factors that determine loan approval
Counseling advice
Private student loan evolution
Q&A
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Types of Consumer Loans
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Mortgages
Home Equity, Home Equity Line of Credit (HELOC)
Auto – RV – Marine – Motorcycle
Student Loan (federal or private)
Payday loans
Credit Cards
Personal loans against assets
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Impact of the recession on credit underwriting
• Root cause of the recession: Mortgage defaults
• 5.4 million of 45 million (12.07%) mortgages
nationwide were delinquent or in some stage of
foreclosure during QI 2009
• Nearly 3 million homes foreclosed on during all of
2009 (1 in 45 homes); more than 2x number in 2007
• Mixed signs of recovery:
• Only 2.2% of current mortgage balances transitioned
into delinquency during 2Q 2011
• Total household delinquency rates have dropped for
six straight quarters; now 9.9%
• However, mortgage originations over last four
quarters were 44% lower than 2003-2007 averages
• Approx. $1.1 trillion of consumer debt is currently
delinquent
Source: Federal Reserve Bank of New York
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Impact of the recession on credit underwriting
• Faced with mounting losses, lenders (except Direct
Loan PLUS) tighten standards on new loan
applications
• How?
• Higher minimum qualification standards (i.e. credit
score, income, co-signer requirements, etc.)
• Longer historical look into personal finances
• Increased pricing (fees and margins)
• Exit the marketplace altogether
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Impact of the recession on credit underwriting
Office of the Comptroller of the Currency (OCC), a division of the U.S. Treasury Department,
publishes an annual survey of Credit Underwriting Practices. Those surveyed included 54 of the
largest banks in the country with assets of $3 billion or more. 17th Annual Survey results include:
Credit Underwriting Practices: Commercial Products
2006
2007
2008
2009
2010
2011
Eased
31%
26%
6%
0%
2%
20%
Unchanged
63%
58%
42%
14%
33%
48%
6%
16%
52%
86%
65%
32%
Tightened
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Impact of the recession on credit underwriting
Credit Underwriting Practices: Residential Construction
2006
2007
2008
2009
2010
2011
Eased
25%
17%
2%
0%
0%
0%
Unchanged
64%
50%
36%
8%
36%
63%
Tightened
11%
33%
62%
92%
64%
37%
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Impact of the recession on credit underwriting
Credit Underwriting Practices: Overall retail products
2006
2007
Eased
28%
20%
0%
0%
Unchanged
65%
67%
32%
17%
26%
63%
7%
13%
68%
83%
74%
30%
Tightened
2008
2009
2010
0%
2011
7%
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Underwriting basics
Definition:
Loan underwriting is the process a
lender uses to determine whether the
risk of lending to
a particular borrower under a
particular set of circumstances is
acceptable.
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Underwriting basics
• Automated underwriting functions
• Credit Scores
• Credit History
• Credit Utilization Ratio
• Manual (or semi-manual) underwriting functions
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Minimum income requirements
Employment history
Debt to Income ratio (DTI)
Loan to Value ratio (LTV)
Down payment
Collateral / Appraisal
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Loan approval factors: Credit Scores
FICO or Credit Scores
 Fair, Isaac and Company
 Developed the algorithm used by most credit bureaus to
calculate a credit score
• A FICO score is the most commonly used credit rating
• Credit scoring is a quick, objective & consistent method for
lenders to measure the “risk” of an applicant
 Scores based solely on information in consumer credit reports
maintained at the credit reporting agencies (Experian,
TransUnion & Equifax)
• The higher the score, the lower the risk
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Loan approval factors: Credit Scores
Types of
Credit in
Use
10%
Length
of Credit
History
15%
New
Credit
10%
Payment
history
35%
Amounts
owed
30%
These percentages are
based on the importance of
the five categories for the
general population.
For particular groups – for
example, those who have not
been using credit for long –
the importance of these
categories may vary.
Source: www.MyFICO.com
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Is there an average credit score?
According to Experian,
the current national average credit
score is….
694
Region
Average Credit
East North Central
698
East South Central
683
Middle Atlantic
702
Mountain
688
New England
712
Pacific
694
South Atlantic
685
West North
Central
709
West South
Central
673
Notes: The average credit
score in PA is 705
Highest state avg: 721
Lowest state avg: 670
Can you guess the states?
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Loan approval factors: Credit history
Lenders may screen for both the length
and usage of credit
• Trade lines (individual credit accounts:
balances, account status, date opened,
credit limit, etc.)
• Credit inquiries (a list of everyone who has
accessed your credit report during the past
two years, both voluntary and involuntary.
• Public record and collection items (public
record data from collection agencies and
courts; info includes liens, judgments,
bankruptcies and wage garnishments)
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Loan approval factors
• Debt to income (DTI) ratio
• How a DTI is determined: Monthly household
liabilities divided by monthly household gross
income = DTI (Also known as back-end/before
mortgage DTI)
• Example: $3500 monthly bills / $10,000 gross
monthly income = 35% DTI
What’s good?
DTI less than 28%
What’s so-so?
DTI between 28-36%
What’s not so good?
DTI greater than 36%
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Loan approval factors, cont.
• Income requirements
• Verification of stated income
• Minimum income requirements
• Employment history
• Length of time with current employer
• Document history of full-time employment (references)
• Credit Utilization ratio
• Percentage of available credit currently in use
• Difficult to determine the right mix
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Loan approval factors, cont.
• Down payment
• Good sign of applicants ability to save
• 20% of mortgage loan value can avoid PMI insurance
• Property – asset appraisal
• Loan to Value (LTV): loan amount / purchase-appraisal price
• Interest rates on Home Equity loans are often tied to LTV
percentages
• Co-borrowing
• Mandatory for approval when applicants have little to no
credit history and/or income
• Can often lead to better rates-fees compared to loans with
one creditworthy applicant
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A recipe for loan approval success
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Solid credit history
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Above average credit score
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Best rates & fees for those with 725 or higher FICO
Verifiable income & low DTI
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No instances of adverse credit / collections for 7 years
Little to no “minor” adverse credit instances
Current & prior year W2’s and DTI less than 30%
Borrow jointly
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Two creditworthy co-borrowers and better than one
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The evolution of underwriting
private student loans
That was then……………
Approvals often based solely on FICO
Direct to consumer loans widely
available to students without a coborrower
Best interest rates were lower than
Prime
Private loans made widely available to
schools below bachelor’s degree level
2007 AD
Originating lenders could easily
securitize loans for additional funds
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The evolution of underwriting
private student loans
And this is now………….
FICO is vital, but only part of equation
Direct to consumer loans are all but gone
While interest rates are low, margins are
much higher
Associate level & below schools have
limited private loan availability
Securitization market is weak for student
loans; lenders still in the game can no
longer “make and sell.”
Remember FFELP?
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The evolution of underwriting
private student loans
School eligibility takes on new significance
Lenders establish eligible school criteria based on:
• CDR thresholds
• Programs of study
• Geographic restrictions
• Graduation rates
• Retention rates
• Accreditation
“Whad’ya mean Faber’s not on
your eligible school list?!?!?”
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In summary…..
• Conditions are slowly improving; private student loan
lenders are gaining confidence in the market
• Fixed rates, at or below PLUS
• Many loans now carry zero fees; repayment benefits
• Forgiveness policies similar to PLUS
• Caution still rules the road
• Strict underwriting guidelines will continue
• Four-year schools still the primary market
• What to expect
• Private lenders ready to compete on price vs. DL PLUS
• More lenders will enter marketplace for 2012-13
• Pricing will steadily improve; approval criteria won’t ease as
rapidly
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Questions
and
discussion
[email protected]
724-499-5822
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