Panelists from regulatory bodies, federal agencies, and Industry leading institutions, share their foresight into the post-pandemic world at RMA’s global conference on small businesses and consumer credit.
The RMA Global Consumer and Small Business Risk (GCSBR) Conference (May 5-7, 2021) provided audiences timely and informative sessions on key topics ranging from pandemic fallouts on financial models and the real economy to emerging risks amid the pandemic.
The three-day conference featured keynotes, breakouts, and panel sessions designed specifically for consumer credit and small business professionals at financial institutions, answering top questions that were asked by lenders in the small business and consumer credit sector. Here are the highlights of the 20 sessions focusing on three main themes – tech and emerging risks, the post-pandemic economic outlook, and the regulatory environment.
Theme #1: Tech and Emerging Risks
- Not all predictive models are focusing on cost-cutting activities.
- How large banks have detected fraudulent activities during the pandemic?
- You are always a target of cyber-attacks.
Mike Hepinstall, Partner at Oliver Wyman who leads the firm’s Financial Services Quantitative Analytics team in the US, told lenders that ‘credit decisioning’ models using machine learning techniques can be not only for lowering the expected loss rates but also increasing the approval rates.
He pointed out another use case of the models for lenders using alternative datasets. “The key opportunity is that a large portion of those 45 million Americans that are in some way limited credit history may move from being unable to access mainstream credit to being well within the lendable population for mainstream lenders,” he noted.
Still, the economic downturn that we have seen due to the COVID-19 pandemic has dramatically impacted the consumer payment data. According to Kevin D. Oden, Ph.D., the Founder and Managing Partner of Kevin D. Oden & Associates and Managing Director of RMA’s Model Validation Consortium (MVC), this will impact the ongoing modeling and validation decisions for years to come.
During another session, Fraud Risk in the COVID-19 Pandemic, the speakers shared their experiences with digital banking fraud detection and learnings from public relief programs such as the Paycheck Protection Program (PPP).
In the early days of the paycheck protection program and other lending programs, it was on top of senior directors’ mind to be agile and decisive on the fraud detection, control, and monitoring strategies, according to Melanie Bargo, Senior Vice President and Senior Director of Financial Crimes Compliance for the Consumer and Business Banking at U.S. Bank.
Many of the fraudsters were digitally savvy, according to Jennifer Malich, Vice President and Risk Manager for U.S. Bank. Considering the situation, the bank used a system that tracked devices and IP addresses and short-listed groups based on demographic attributes, names, addresses, email addresses, funding accounts, telephone numbers and loan documentation.
“We shared this information with our partners on the fraud operations team and the payments fraud team,” noted Jennifer Malich, Vice President and Risk Manager for U.S. Bank. She added that the bank established safeguards to prevent the known fraudsters and their associates from getting through the second round of the PPP. “And it's made a huge impact. In addition, we've flagged all of those round-one booked loans for review and forgiveness,” said Malich.
The accelerated digitalization amid the pandemic has brought on cyber risks too. During one of the live sessions, Managing Consumer Cyber Risk, Special Agent in the FBI, Michael DeNicola shared his experiences around cyber-attacks through case studies and first-hand knowledge. He listed out three of the most common ways cybercriminals can infiltrate your organization: Phishing and spear phishing, business email compromise, and ransomware.
“You are always a target,” he said, adding that the conference audiences should not let the above case study happen to them. The Special Agent then covered examples of phishing attempts and how to spot and prevent them. Let’s be aware of the cyberattacks, try not forgetting to activate two-factor authentications on all logins, keep all products and systems updated and always have a plan, according to DeNicola.
Theme #2: Economic Outlook
- The current recession is not a typical situation for consumers.
- Some consumers may have been too cautious with the liquidity risk.
- Pockets of the recovery include car loans and mortgages.
According to Cristian deRitis Ph.D., CBE, Deputy Chief Economist and Senior Director at Moody’s Analytics, the current recession is not a typical situation for consumers. He pointed out it is partially because many of the U.S. consumers used a significant portion of the stimulus checks to debt payments and savings.
The US mortgage balances increased recently, he noted, adding that the mortgage delinquencies were projected at record lows. This was based on the percentage of the outstanding balance of late payment rates of three subcategories – the primary lien, the home equity line of credit, and the home equity loan installments. “The home prices continue to climb at a very significant pace and that is going to help the delinquency rates keep low,” deRitis said.
Notably, changes that we saw in 2020 were not following typical patterns of a recession. This time, the average credit score has risen as the delinquency rates have fallen, data provided by Moody’s Analytics and Equifax showed. “One critical risk that I see today is the risk of complacency,” deRitis said, adding, “Everything was flipped around when it comes to the credit scores.”
According to Duane Elmer, the Enterprise Consumer and Small Business Credit Risk executive within the Enterprise Credit Risk organization at Bank of America, many of the industry participants may have expected to see higher levels of unemployment, delinquencies, and credit utilization due to the COVID-19 crisis.
Elmer noted that the increased liquidity may partially explain why the demand for housing is strong. “There is more of a housing boom now, compared to the last credit cycle,” said Elmer. He noted that the recovery is snapping back much quicker; however, it is not consistent or uniform across industry and geography. “We will have to watch and see,” he added, explaining the geographic and sectoral variability in the economic recovery.
Notably, one of the speakers pointed out why some banks may think that the current loan loss reserve amounts are ‘exaggerated’ to a degree. Rebecka Holt, Executive Vice President and Director of Central Credit and Business Banking at Frost Bank, noted that many people may have not thought through how the massive amount of stimulus would help customers. “We didn't anticipate how much customers would be flush with liquidity as they progressed the pandemic,” she added.
Mike Kane, Vice President of Consumer Credit Operations at Ally Financial, said during the first 90-day into the pandemic, his organization and the auto industry participants saw “a significant disruption”. He noted that the pandemic had changed consumers’ auto buying decisions as well as their usage of cars as many of the workforces went home and worked remotely.
“We did our part. [Lenders] put accommodations out,” added Kane, explaining that those accommodations – loans that borrowers are not obligated to compensate the lender – were peaked during April and May 2020, and then trailed off by June last year.
Carmella Teague, Senior Vice President of Consumer Credit at Regions Bank told the audience, unlike other consumer forbearance levels, the real estate forbearance has been remained elevated. According to her, those who have been on payment holidays for 12 months or longer would need a long-term solution.
“In the mortgage industry, we had forbearances peak at over 10 percent. Those that came out first, much like the auto [industry], they are performing well and strong, but the ones that have lingered would need longer assistance and more significant modification,” she said.Theme #3: Regulatory Environment
- The Consumer Financial Protection Bureau (CFPB) is back.
Three legal advisors from Debevoise & Plimpton - David Sewell, Courtney Dankworth, and Johanna Skrzypczyk addressed the expected focuses of the Consumer Financial Protection Bureau (CFPB).
The role of the CFPB in consumer-facing lending practices has become critical as it can propose the further postponement of foreclosures or permit debt servicing companies to modify options for existing loans.
“So, the spending patterns got strange,” David Arasmith, Senior Vice President of Asset Resolution Risk group at Truist said, explaining the typical environment that people would expect from looking at financial risk was not necessarily happening. “You have subsidies and stimulus coming in. You have accommodations being granted,” he added.
Although the overall outlook for regional economies has improved across the U.S., the job recovery may take longer than we expected, according to Moody’s. It is because the economic impact of the COVID-19 pandemic on industries varied over time. For instance, the hospitality sector saw a growth in the payroll amount in March 2021. However, the net balance of the payroll amount changes in the hospitality sector was still in the negative territory.
Three of the conference speakers added that the lessons they learned from this pandemic not only will enable them to design better risk scores in the future in the collection space but also throughout the rest of their origination and portfolio management tools.
As Product Marketing Specialist, Adalla is responsible for driving both the strategic and tactical aspects of RMA’s product sales. Prior to RMA, Adalla worked as a reporter for global media services and publication groups such as PEI Media and the Financial Times Group. She started her career at Campbell Lutyens, a global private capital advisory group. As an avid learner and a curious adventurer, Adalla speaks Korean, English, and Spanish, and has traveled to 19 countries. She graduated from Incheon National University with a Bachelor of International Trade in Northeast Asia Economic Studies.