US CONSUMER CREDIT RISK

Trends and Expectations

FIRST QUARTER 2011

A Survey by the
Professional Risk
Managers’ International
Association

March 2011

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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 60 chapters around the world
and more than 75,000 members from 198 countries.
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
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that drive smarter decisions. The company’s groundbreaking
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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
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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

T
he present survey finds most risk management professionals to be optimistic
about the next six months. While still concerned about the level of home equity
line and mortgage delinquencies, likely as the result of the slow recovery of the
housing market, risk managers feel more optimistic in regard to delinquencies of other
types of loans and credit. While a rise in interest rates is predicted, a rise in credit
requests and approvals is also forecasted. Looking ahead, nearly half of respondents
do not believe interest rates on 30-year loans will go above 6% in 2011, and most are
unsure if first-party fraud will pose a significant threat over third-party. Throughout all
the survey questions, about 30.0% of the responders predict no change over the next
six months, suggesting a general feeling of certainty emerging from the extreme
volatility of the previous five years.

Key findings, predictions about the next six months:

■ Most respondents feel that the level of mortgage and home equity line delinquencies
will rise or stay the same.
■ There is no clear consensus on credit card delinquencies, with an equal number of
respondents predicting an increase, decrease, or no change.
■ Most respondents feel that auto loan and small business loan delinquencies will
decrease or stay the same.
■ Nearly half (46.7%) of the respondents predict an increase in student loan delinquencies.
■ A majority of respondents (53.7%) expect an increase in interest rates.
■ Half of respondents (52.6%) predict an increase in the amount of credit or loans
requested by consumers. 49.5% feel that the amount of credit extended to consumers
will rise.
■ A large majority (92.7%) of respondents believe the number of existing customers
who request credit line increases will increase or stay the same, with only one third
(33.5%) forecasting an increase in new delinquencies.
■ A majority (84.2%) believe the amount of credit requested by small businesses will
increase, with 60.1% expecting the amount of credit extended to increase in turn.

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S U R V E Y D E TA I L S

KEY FINDINGS AND ANALYSIS

Delinquency Predictions are Mixed

■ In general, most (81.8%) believe that the level of mortgage delinquencies will stay about the
same or increase in the next six months, with a small number (18.1%), believing they will
decrease. Over the past year, more respondents have begun to move toward predicting a
decrease, with the number growing from 10% in April 2010 to 15% in November 2010.
■ Respondents felt similarly about home equity line delinquencies, with the same upward trend of
respondents hopeful for a decrease. However, in the past six months this group has plateaued
at roughly 20% of those surveyed.
■ Turning to credit card delinquencies over the next six months, roughly one third (28.3%) of
respondents feel that they will increase, one third (36.3%) predict a decrease, and one third
(35.4%) feel they will stay about the same. However, this appears quite different from April
2010, when a majority (56.2%) of respondents expected an increase. At that time, less than
10% predicted a decrease.
■ When asked about the level of auto loan delinquencies, most felt the level would decrease or
stay the same (76.4%). As with credit card delinquencies, this number is higher than ten
months earlier, when only a little over half of respondents (56.2%) answered similarly.
■ When asked about small business loan delinquencies in the next six months, respondents again
were equally divided between the prediction of an increase (30.6%), a decrease (37.2%), and no
change (32.5%). However, as observed with credit card delinquencies, numbers from ten months
ago were quite different, with more than half (59.2%) expecting an increase.
■ Finally, when asked to predict student loan delinquencies, only roughly 15.4% of respondents
predicted a decrease, with 46.7% predicting an increase, and 38.0% feeling the rate would
remain unchanged. This looks fairly similar to previous surveys.
■ Overall, risk managers appear hopeful for the next six months, expecting decreases in
delinquencies on short-term loans and revolving credit, with potential increases in delinquencies
on long-term loans. However, it should be noted that across the six categories of loans, on
average one third (37.3%) of respondents predicted no change.
SEE GRAPH ON NEXT PAGE.

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S U R V E Y D E TA I L S

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

The level of student loan delinquencies to

0% 10% 20% 30% 40% 50%

Increase significantly
Increase somewhat
Stay about the same
Decrease somewhat
Decrease significantly

FIGURE 1

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S U R V E Y D E TA I L S

Forecasting Rate Increases Along With More Borrowing Behavior

■ Turning now to interest rates, half of the respondents felt rates would increase somewhat
(50.0%) with a small number (5.2%) expecting a large increase. Only 2.4% of individuals
surveyed expected a small decrease. Interestingly, in November of 2010, 14.8% expected a
decrease, while only 37.0% expected a small increase.
■ As far as consumers’ average credit card balances, many respondents (34.8%) feel that it will
stay relatively unchanged over the next six months, while slightly more (41.1%) expect an
increase. Numbers remain relatively unchanged over the past year.
■ In regard to applications for loans and credit, slightly less than half (47.1%) expect to see more
applications in the next six months, with 34.8% of respondents expecting the rate to remain
about the same. This is higher than four months earlier, when 38.3% of respondents expected
higher volume.
■ In terms of the amount of credit or loans requested by consumers, half (52.6%) expect this to
increase over the next six months. Over the past year, an increasing number of respondents
have felt this way, with the current number up from 35% six months earlier.
■ However, when asked about the approval rates of these increased applications, reactions were
mixed. Less than half (45.2%) felt these would stay the same as previous approval rates. 24.3%
expected a decrease, while 30.5% expected an increase. Compared to August of last year, when
35.2% of respondents expected a decrease, sentiment is generally more positive.
■ The amount of credit extended is also uncertain, with slightly less than half (49.5%) feeling the
amount will increase, about one third (30.0%) predicting the same average amount, and only
20.4% predicting a decrease. Again, compared to August, a more positive attitude is observed.
At that time, only 30% predicted an increase.
■ Finally, slightly less than half of respondents (44.9%) look for the approval criteria for common
credit and loan products to stay about the same, while just over one third (37.1%)expect them
to become more stringent. This appears to have changed between August and November of
last year. Prior to November, many (41.1%) predicted an increase in the stringency of approval
criteria, while only 35.6% expected it to remain the same. Throughout this time, a low percent-
age (13.6%) of the respondents have indicated that they expect the criteria to loosen.

SEE GRAPH ON NEXT PAGE.

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S U R V E Y D E TA I L S

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 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
FIGURE 2

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S U R V E Y D E TA I L S

Risk Management a Clear Priority

■ Most risk managers surveyed (61.4%) expect that the priority placed on risk management at their organi-
zations will increase over the next budgeting cycle, and 34.8% believe the priority will stay the same.

During the next budgeting cycle, do you expect:

50% Increase significantly

Increase somewhat
40%
Stay about the same
Decrease somewhat
30%
Decrease significantly

20%

10%

0%
FIGURE 3
The priority placed on risk management at your institution to

■ This seems especially prescient given that 92.7% of respondents believe the number of existing
customers who request credit line increases will increase or stay the same. In contrast, a smaller
number of respondents believe credit-line increase requests will decrease.
■ While one third (33.5%) of the respondents forecast an increase in new delinquencies on consumer
lending products, a similar number (32.6%) expect a decrease. Over the past year, the number of
respondents expecting a decrease has grown from 17.5% to nearly one third.
■ In respect of total delinquencies, predictions remain mixed with roughly an equal number expecting
the number to increase, decrease and stay the same.

Looking at the industry as a whole, over the next six months, do you expect:
Increase significantly
The number of existing customers Increase somewhat
who request credit-line increases to Remain the same
The total number of delinquencies (of 90 Decrease somewhat
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

FIGURE 4

0% 10% 20% 30% 40% 50%

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S U R V E Y D E TA I L S

Growing Small Businesses

■ Turning now to small businesses in particular, an overwhelming majority of respondents (84.2%)
believe the amount of credit requested by small businesses will increase.
■ Responding to this increase, slightly over half (60.1%) of the respondents believe the amount of
credit extended to small businesses will increase.
■ Similarly, slightly less than half of respondents (49.3%) look for approval rates of applications by
small businesses to increase; with another third (36.0%) predicting it will remain the same.
■ Most respondents appear very positive in regard to small businesses in general, looking for them
to request and receive more credit, without having an increased rate of delinquencies.

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% 80%

Increase significantly
Increase somewhat
Remain the same
Decrease somewhat
FIGURE 5
Decrease significantly

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S U R V E Y D E TA I L S

Historical Analysis

Most risk managers surveyed (61.4%) expect that the priority placed on risk management at their organizations
will increase over the next budgeting cycle, and 34.8% believe the priority will stay the same.

More respondents have begun to predict decreases in the level of mortgage and home equity line delinquencies.
20.9%
20% 20%
18.1%
18% 18% 17.5%
16.4%
13.4% 15.1%
16% 16%
14% 14%
12% 12%
10% 10%
10% 10%
8% 8%
6% 6%
4% 4%
2% 2%
0% 0%
Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2010 Q3 2010 Q4 2010 Q1 2011

Mortgage delinquencies – percent of Home equity delinquencies – percent of

respondents expecting a decline FIGURE 6 respondents expecting a decline
FIGURE 7

Similarly, fewer respondents predict an increase in credit card, auto loan, and small business loan delinquencies.

40% 40% 37.2%

36.3%
35% 35%

30% 30%

25% 23.4% 25% 24%

22.4%
20.7%
20% 20%
15.4%
15% 15%
9.1% 10%
10%

5% 5%

0% 0%
Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2010 Q3 2010 Q4 2010 Q1 2011

Credit card delinquencies – percent of Auto loan delinquencies – percent of

respondents expecting a decline respondents expecting a decline
FIGURE 8 FIGURE 9

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S U R V E Y D E TA I L S

40% More respondents believe a rate increase

36.2% ■

35% will occur; however, predictions regarding

consumers’ average credit card balances
30%
remain unchanged.
25%
20.6% ■ Compared to previous surveys, more
20% 18.5%
respondents predict that loan and credit
15% applications, amounts, and approvals will
11.5%
10% increase.
5%

0% FIGURE 10

Q2 2010 Q3 2010 Q4 2010 Q1 2011

Small business loan delinquencies – percent of

respondents expecting a decline

20%
18%
16% 15.4%
14%
12%
10% 9.2% 9.1%
7.6%
8%
6%
4%
2%
0% FIGURE 11

Q2 2010 Q3 2010 Q4 2010 Q1 2011

Student loan delinquencies – percent of

respondents expecting a decline

40%

35%
29.3%
30%

25%
20.8%
20% 17.5%
15%

10%

5%

0% FIGURE 12

Q2 2010 Q3 2010 Q4 2010 Q1 2011

Total number of delinquencies – percent of

respondents expecting a decline

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S U R V E Y D E TA I L S

Looking Ahead
■ On the number of pre-approved credit card solicitations sent to U.S. consumers, respondents
were sharply divided, with slightly over one third (44.0%) believing that these will increase in
2011 when compared to 2010 levels, and 39.5% disagreeing.
■ Further, many (52.2%) believe that interest rates on 30-year, fixed-rate mortgages in the U.S.
will not go above 6% in 2011. While one third (36.3%) of respondents do not know if Basel III
regulations will have a negative effect on the profitability of U.S. banks, a larger number (45.1%)
believe they will.
■ Another area of uncertainty involves the cost of first-party fraud in comparison to third-party
fraud for U.S. banks. Half of respondents (56.7%) are undecided if the cost of first-party fraud
will exceed the cost of third-party fraud in 2011. A seemingly equal number (23.9% vs. 19.4%)
believe it will or won’t, respectively.
■ Finally, an overwhelming majority of respondents (75.5%) believe that the combined effect
of the CARD Act and the Dodd-Frank Act will restrict the availability of credit for high-risk
consumers, with less than 10% (9.9%) believing it will not have such an effect.

Choose the answer that best describes your sentiment:

Agree strongly
The number of pre-approved
Agree
credit card solicitations sent to U.S.
consumers in 2011 will exceed 2010 Undecided
levels by at least 25%
Disagree
Interest rates on 30-year, fixed-rate Disagree strongly
mortgages in the U.S. will go above
6% in 2011, even for buyers with
outstanding credit

Basel III regulations will have a

material, negative effect on the
profitability of U.S. banks

In 2011, the cost of first-party

fraud will exceed the cost of
third-party fraud for U.S. banks

The combined effect of the CARD Act

and the Dodd-Frank Act will restrict
the availability of credit for
high-risk consumers
FIGURE 13
0% 10% 20% 30% 40% 50% 60%

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RESPONDENT PROFILE
Your job (select most appropriate)

16.7% 17.6%

Chief Risk Officer

9.3% Functional leader

Portfolio/product management
Business/risk analyst
26%
Other
FIGURE 14

30.4%

216 respondents completed the survey, with 30.4% of them identifying as a Business
or Risk analyst, and 16.7% identifying as the Chief Risk Officer of their company.

What is your area of responsibility (check all that apply)?

60%
54.3%
49.7% Card portfolio
50%
46.4% Mortgage portfolio

40% Auto loan portfolio

31.1% Direct deposit accounts
30% Lines of credit
Student loans
20%

10.6% 11.3%
10%

0% FIGURE 15

Large percentages identified areas of responsibility in card portfolio (49.7%),

mortgage portfolio (46.4%), and lines of credit (54.3%).

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What is the business What is the size of your

orientation of your institution institution (by total assets)?
(select the most appropriate)?

13.6%
6.7%
7.9%
7.1%

43.9%
9% 7.1%
50%

9.6%

28.3%

16.9%
Up to $5 billion FIGURE 17
FIGURE 16
$5 – $10 billion
Full Service Bank
Credit Union $10 – $20 billion

Mortgage lender $20 – $40 billion

Wealth management, investments, retirement services
Discount and/or self-serve financial services
Credit Card Monoline
Many (50.0%) work at full service banks, and
most (65.0%) work for a company with at
least National reach.
$40 + billion
A quarter (28.3%) work at companies
with more than $40 billion dollars in
assets, with a bit less than half (43.9%)
working at a smaller firm (up to $5
billion in assets).

What is the
geographic reach 32%
32%
of your institution? Global

National

Regional
Local
1%
Internet-based

12.7%
22.3% FIGURE 18

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