Proactive Line Management Helps Increase Bank Profitability

Our recent consumer credit trends summaries indicate that credit is becoming more available. There are increases in the number of open credit lines across multiple products though the average credit line is still relatively low compared to pre-recession levels.

We are hearing from many banks looking to proactively increase credit lines for their best customers. The banks indicate that their customers tend to maintain a consistent balance to available credit ratio. For example, if the bank increases the credit limit for a customer maintaining a 25% ratio, the customer will often increase spend a corresponding amount, and the ratio will remain consistent. Increased spend delivers higher revenue due to interchange fees and interest income. As long as risk is effectively managed, this is profitable growth within an existing portfolio.

To grow in this fashion, banks must comply with consumer regulations in place to govern the process of extending available credit and a consumer’s ability to pay, otherwise known as Regulation Z or “Reg Z” for short. Banks need to make sure their customers can effectively manage the additional available credit; evaluating customer income is one stipulation to help meet the regulation. While modeled income has originally been stated as acceptable within the guidelines, some of our clients are telling us they do not intend to use modeled income to meet this requirement. This appears to be consistent to what is stated by the American Financial Services Association:

Regulation Z commentary permits issuers to use either “stated income” or “modeled income” that reasonably estimates a consumer’s income when considering a consumer’s ability to pay. Income models must meet Regulation Z requirements that they are empirically derived, demonstrably and statistically sound. The Office of the Comptroller of the Currency (“OCC”) has questioned whether such model estimates are reasonable and have ordered some issuers to stop using modeled income, even though the authority to enforce Regulation Z has been transferred to the CFPB.

Without modeled income, that leaves stated and verified income as available options to meet Reg Z requirements. We have worked with banking clients that have a great deal of available internal income data, stated and verified, available on their customers. Banks collect income on all applications, it’s verified on mortgages, and it’s sometimes verified on auto and other retail loans. And there are various components that have to be considered; is the stated income on an approved or denied application, how old is the information, are there multiple instances of income, and if so which is more recent, etc… Business and technical considerations include current data sharing agreements across the bank, and whether the information is available centrally and systemically.

At Equifax we can help with these challenges. We help banks link disparate information, build central repositories of information, and enable real-time access to internal customer information. We deliver the analytical due diligence to help our customers evaluate multiple available income assets to determine the best combination to use in different circumstances, and utilize them in the decisioning processes. On top of that, we have the largest US database of automated, verified income. Our solutions can also automate the application of robust risk policies on existing accounts, including evaluating income to meet “Reg Z” requirements, and help banks in meeting their goals to deliver profitable growth.

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This post was contributed by: Lee Grice.

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