Risk Management

Joel Pruis – Director of Advisory Services, Baker Hill 

Thank you for visiting! I’m Joel Pruis, director of Advisory Services at Baker Hill, a part of Experian.

I hope that this blog will provide great conversation around risk management and how it can impact your financial institution.

I have over 20 years of business experience with: portfolio risk management for small business loans originated via credit scoring; process management for small business lending; and commercial lending across all levels of risk exposure. 

In my current position, I lead a team of practice managers specializing in relationship management, origination, portfolio management, pricing and profitability and process analytics. My goal is to provide the direction and coordination of industry best practices to support our client’s strategic vision.

Personally, I grew up in Grand Rapids, Michigan and am the youngest of three children. I love to travel and enjoy spending time with my wife and three children.

Roger Ahern, Senior Director, Decision Analytics, Solutions Management

   Hi!  I'm new to the team and look forward to sharing my thoughts about risk management with you.

At Experian, I work closely with clients using a consultative approach to develop solution recommendations that deliver substantial business value. 

Prior to joining Experian, I worked for Fair Isaac Corporation and HNC Software.  I have 20 years of experience in product management, consulting, marketing, business development and sales management, with corporate-officer experience at a publicly traded software and analytics company. 

I also have extensive domestic and international experience working directly with senior executives at top financial institutions and telecom carriers to realize business value via analytic applications that leverage decision engine technology, predictive analytic models, workflow management systems and business intelligence software.

I earned my bachelor's degree in Finance (magna cum laude) from San Diego State University and earned my master's degree in Information Technology (summa cum laude) from the same university.


 

--by Roger Ahern

The value of a good decision can generate $150 or more in customer net present value, while the cost of a bad decision can cost you $1,000 or more.  For example, acquiring a new and profitable customer by making good prospecting and approval and pricing decisions and decisioning strategies may generate $150 or much more in customer net present value and help you increase net interest margin and other key metrics.  While the cost of a bad decision (such as approving a fraudulent applicant or inappropriately extending credit that ultimately results in a charge-off) can cost you $1,000 or more.

Why is risk management decisioning important?

This issue is critical because average-sized financial institutions or telecom carriers make as many as eight million customer decisions each year (more than 20,000 per day!).  To add to that, very large financial institutions make as many as 50 billion customer decisions annually.  By optimizing decisions, even a small 10-to-15 percent improvement in the quality of these customer life cycle decisions can generate substantial business benefit. 

Experian recommends that clients examine the types of decisioning strategies they leverage across the customer life cycle, from prospecting and acquisition, to customer management and collections.  By examining each type of decision, you can identify those opportunities for improvement that will deliver the greatest return on investment by leveraging credit risk attributes, credit risk modeling, predictive analytics and decision-management software.

There are a lot of areas covered in your comment: efficiency; credit quality (human side or character in an impersonal environment); and policy adherence. 

We define efficiency and effectiveness using these metrics:

• Turnaround time from application submission to decision;
• Resulting delinquencies based upon type of underwriting (centralized vs. decentralized);
• Production levels between centralized and decentralized;
• Performance of the portfolio based upon type of underwriting; and
• Turnaround time from application submission to decision

Due to the nature of Experian’s technology, we are able to capture start and stop times of the typical activities related to loan origination.  After analyzing the data from 160+ financial institutions of all sizes, Experian publishes an annual small business benchmark report that documents loan origination process efficiencies and inefficiencies, benchmarking these as industry standards.  

Turnaround Time

From the benchmark report, we’ve seen that institutions that are centralized have consistently had a turnaround time that is half of those with decentralized environments.

Interestingly, turnaround time is also much faster for the larger institutions than for smaller.  This is confusing because the smaller community banks tend to promote the close relationship they have with their clients and their communities. Yet, when it comes to actually making a loan decision, it tends to take longer.

In addition to speed, another aspect of turnaround is consistency.  We all can think of situations where we were able to beat the stated turnaround times of the larger or the centralized institutions.  Unfortunately, these tend to be isolated instances versus the consistent performance that is delivered in the centralized environment.

Resulting delinquencies based upon type of underwriting/Performance of the portfolio based upon type of underwriting

Again, referring to the annual small business lending benchmark report, delinquencies in a centralized environment are 50% of those in a decentralized environment. 

I have worked with a number of institutions that allow the loan officer/relationship manager to “reverse the decision” made by a centralized underwriting group.  The thinking is that the human aspect is otherwise missing in centralized underwriting.  When the data is collected, though, the incremental business/portfolio that is approved by the loan officer (who is close to the client and knows the human side) is not profitable from a credit quality perspective.  Specifically, this incremental portfolio typically has a net charge-off rate that exceeds the net interest margin -- and this is before we even consider the non-interest expense incurred. 

Your choice: is the incremental business critical to your success…or could you more fruitfully direct your relationship officer’s attention elsewhere?

Production levels between centralized and decentralized

Not to beat a dead horse, but the multiple of two comes into play here too.  As one looks at the throughput of each role (data entry, underwriter, relationship manager/lender), the production levels of a centralized environment are typically double that of a decentralized.

It’s clear that the data point to the efficiency and effectiveness of a centralized environment

While it’s clear that new regulations from Capitol Hill are on their way, I urge a balance between the push for growth in loan outstandings with the need to maintain or improve the overall credit quality of existing and new loans. Without that balance, we will end up right where we started -- with increased loans with increased loan delinquencies and charge-offs. Further, I urge the regulatory changes to not simply be "add-on's".  They should be meaningful modifications of existing regulations or better review and enforcement of compliance with these regulations’ intended purposes.

• Maximizing client retention
• Maximizing cross-sell opportunities
• Minimizing loss potential due to credit-risk issues
• Minimizing loss potential due to operational risks
• Maximizing profitability through the timely identification o f risk and the appropriate allocation of capital

Below are a few risk management strategies that your financial institution can implement through the utilization of automated portfolio monitoring:

Special accounts strategies
Focus your internal resources on accounts with a high probability of recovery. Minimize "distractions" of resources and determine the probability of rehabilitation. By utilizing these strategies, your financial institution may be able to handle more accounts with same staff levels and have quicker and more accurate responses.

Focus your internal resources
Focus your risk management resources on the accounts that are showing signs of deterioration, those that have fallen below minimum thresholds and show a significant decline from prior year performance. By doing this you can avoid credit review by identifying continuing high performers and negligible declines in credit quality.
 

• Take a look at how your perception of small business loans has kept you from preventing problem situations.
   
• Consider migrating to a more proactive approach in your loan renewal/review process; it can have an impact on your profitability.
   
• Consider freeing up more time for your lenders and relationship managers and investigate what could be done with that time to better benefit your financial institution.

1.       Portfolio Management – You should really focus on this topic in 2009.  With many institutions already streamlining the origination process, portfolio management is the logical next step.  While the foundation is based in credit quality, portfolio management is not just for the credit side. 

2.       Review of Data (aka “Getting Behind the Numbers”) – We are not talking about scorecard validation; that’s another subject.  This is more general.  Traditional commercial lending rarely maintains a sophisticated database on its clients.  Even when it does, traditional commercial lending rarely analyzes the data. 

3.       Lowering Costs of Origination – Always a shoe-in for a goal in any year!  But how does an institution make meaningful and marked improvements in reducing its costs of origination? 

4.       Scorecard Validation – Getting more specific with the review of data.  Discuss the basic components of the validation process and what your institution can do to best prepare itself for analyzing the results of a validation.  Whether it be an interim validation or a full-sized one, put together the right steps to ensure your institution derives the maximum benefit from its scorecard.

5.       Turnaround Times (Response to Client) –Rebuild it.  Make the origination process better, stronger and faster.  No; we aren’t talking about bionics here -- nor how you can manipulate the metrics to report a faster turnaround time.  We are talking about what you can do from a loan applicant perspective to improve turnaround time.

6.       Training – Where are all the training programs?  Send in all the training programs!  Worry, because they are not here.  (Replace training programs with clowns and we might have an oldies song.)  Can’t find the right people with the right talent in the marketplace? 

7.       Application Volume/Marketing/Relationship Management – You can design and execute the most efficient origination and portfolio management processes.   But, without addressing client and application volume, what good are they?

8.       Pricing/Yield on Portfolio – “We compete on service, not price.” We’ve heard this over and over again.  In reality, the sales side always resorts to price as the final differentiator.  Utilizing standardization and consistency can streamline your process and drive improved yields on your portfolio.

9.       Management Metrics – How do I know that I am going in the right direction?  Strategize, implement, execute, measure and repeat.  Learn how to set your targets to provide meaningful bottom line results.

10.    Operational Risk Management – Different from credit risk, operational risk and its management, operational risk management deals with what an institution should do to make sure it is not open to operational risk in the portfolio. Items totally in the control of the institution, if not executed properly, can cause significant loss.

What do you think? As the end of April approaches, are these still hot topics in your financial institution?

The debate continues in the banking industry -- Do we push the loan authority to the field or do we centralize it (particularly when we are talking about small business loans)?

A common argument for sending the loan authority to the field is the improved turnaround time for the applicant. However reality is that centralized loan authority actually provides a decision time almost two times faster than those of a decentralized nature.  The statistics supporting this fact are from the Small Business Benchmark Study created and published by Baker Hill, a Part of Experian, for the past five years.

Based upon the 2008 Small Business Benchmark Study, those institutions with assets of $20 billion to $100 billion used only centralized underwriting and provided decisions within 2.5 days on average. In contrast, the next closest category ($2 billion to $20 billion in assets) took 4.4 days.

Now, if we only consider the time it takes to make a decision (meaning we have all the information needed), the same disparity exists.  The largest banks using solely centralized underwriting took 0.8 days to make a decision, while the next tier ($2 billion to $20 billion) took an average 1.5 days to make a decision.  This drop in centralized underwriting usage between these two tiers was simply a 15 percent change. This means that the $20 billion to $100 billion banks had 100% usage of centralized underwriting while the $2 billion to $20 billion dropped only to 85% usage. Eighty-five percent is still a strong usage percentage, but it has a significant impact on turnaround time.

The most perplexing issue is that the smaller community banks are consistently telling me that they feel their competitive advantages are that they can respond faster and they know their clients better than bigger, impersonal banks.  Based upon the stats, I am not seeing this competitive advantage supported by reality.  What is particularly confusing is that the small community banks, that are supposed to be closest to the client, take twice as long overall from application receipt to decision and almost three times as long when you compare them to the $20 billion to $100 billion category (0.8 days) to the $500 million to $2 billion category (2.2 days).

As you can see - centralized underwriting works.  It is consistent, provides improved customer service, improved throughput, increased efficiency and improved credit quality when compared to the decentralized approach.  

In future blogs, I will address the credit quality component.

This post continues the feature from my colleague and guest blogger, Mark Sofietti, Associate Process Architect in Advisory Services at Baker Hill, a part of Experian.

In today’s market, the banking industry seems to be changing at a very rapid pace.  The current crisis that we are in, as an industry and as a nation, is forcing institutions to revisit risk management policies and procedures to make the appropriate changes needed to remain healthy and profitable.  However, the current crisis is not the only reason why institutions should focus on change management.  Change management needs to be appropriately handled in bad and good times.  Understanding change management is always a necessity to a well-run organization.  Whether it is a reorganization, a new software system, a new policy or moving to a new building, change can cause a great deal of stress and uncertainty -- but it can also cause benefits.

So, as managers, you may be asking, “What can I do to ensure that positive changes are happening within my organization?  What are some of the items that I should consider when I am bringing about organizational change?” 

There are four necessary steps that need to be taken in order to improve the success of an initiative that is causing change to an institution. I covered two in my last post. Here are the additional steps.

3. Consider methods of change
One method of change is the education of individuals about new ways of operating.  This method should be used when there is more resistance to change and when individuals lack a clear understanding or knowledge of the change being made.  Education may cause the implementation to take longer, but those involved will better understand the effects of the change.

A second method is gathering participation from different levels and skill sets within the organizations.  Building a team should be used when there is the highest risk of failure due to change resistance and when more information needs to be gathered before an effective implementation can be completed.

Negotiation is a method that is used when a group or person is going to be negatively affected by the change.  This method could alleviate the discomfort by giving the person or group some other benefit.  Negotiations could allow an organization to avoid resistance, but it may be very costly and time consuming to implement the change.

The coercion change method is when a change is implemented with little room for diversion from the plan.  Employees are told what the change is going to be and they have to accept it.  This method should be used when speed is of the utmost importance, or if the change is not going to be easily accepted.  Most employees do not like this approach and it may cause resentment or it might cause staff members to leave.

The final method of change uses manipulation, the conscious decision to share limited information about the change that is taking place.  This method should only be used when no other tactic will work, or if time or cost is major issues.  This approach is dangerous because it can lead to more problems in the future.

4. Create plan of action
A plan should be created for the implementation of change to clearly address reservations and define the change strategy.  It should include internal and external audiences who can be affected by the change.  It is common to forget those who are indirectly impacted by the change -- and these audiences (customers, for example) may be the most important.  Objectives of the change need to be clearly outlined in the plan in order to understand how the new future state of the organization will look and operate.  The plan needs to be communicated to all those involved so that the transition can be understood and everyone can be held accountable.  The plan should be periodically revisited after implementation in order to review progress.  Creating a plan of action is a very important step to ensure that those who resisted the change do not revert back to their old habits. 

Achieving change is not an easy process, especially when time is not on your side.  If you take a second look at the change that you are trying to implement and do the necessary planning, you have a greater chance for success than if you or your organization fails to fully evaluate the consequences. 

Effective change management should be part of any financial risk management process. Take charge of your institution’s future through a calculated approach to change management and your organization will be in a better position for the next change that is coming around the bend.
 

This post is a feature from my colleague and guest blogger, Mark Sofietti, Associate Process Architect in Advisory Services at Baker Hill, a part of Experian.

Change is inevitable.  If you are not changing, then you are standing still and the world around you is changing.  In today’s market, the banking industry seems to be changing at a very rapid pace.  The current crisis that we are in, as an industry and as a nation, is forcing institutions to revisit their risk management policies and procedures to make the appropriate changes needed to remain healthy and profitable.  However, the current crisis is not the only reason why institutions should focus on change management.  Change management needs to be appropriately handled in bad and good times.  Understanding change management is always a necessity to a well-run organization.  Whether it is a reorganization, a new collections software system, a new policy or moving to a new building, change can cause a great deal of stress and uncertainty -- but it can also cause benefits.

So, as managers, you may be asking, “What can I do to ensure that positive changes are happening within my organization?  What are some of the items that I should consider when I am bringing about organizational change?” 

There are four necessary steps that need to be taken in order to improve the success of an initiative that is causing change to an institution.

1.  Understand current situation and needs
The first item necessary to have a successful implementation of change is to understand the current climate and reason for the change.  People are scared of change and many believe that “if it is not broken, don’t fix it.”  This is why the reasons for change need to be understood and communicated to all employees.  Changing, just for the sake of changing, causes a great deal of unrest to a department or organization.  With clearly defined reasons and objectives, the implementation of change can have a lower degree of failure.

2.  Identify resistance
During change, there will be some form of resistance.  As a manager, you will need to have thought through from where resistance might come and consider how to work through confrontations. 

One type of major resistance can be people who are looking out for their own self-interests.  People have their own agendas within the workplace and could view change as a threat to their advancement.  When dealing with these situations, you will need to have a good deal of collaboration and involvement from these individuals in order to successfully implement change.  Note, given this resistance, that the change will not happen as quickly and your timelines should be appropriately set. 

Another major resistance that may slow down the implementation of change is the lack of trust in the leaders enacting the change.  In these situations, management should build teams of trusted and respected people whose objective is to eliminate underlying resistance. 

Finally, providing facts and examples regarding the change is a necessity for a successful implementation.  Doing so can reassure employees that the change being made is beneficial to the organization.

The next post will continue with the additional two necessary steps that need to be taken in order to improve the success of an initiative that is causing change to an institution.

 

We have talked about: the creation of the vision for our loan portfolios (current state versus future state) – e.g. the strategy for moving our current portfolio to the future vision. Now comes the time for execution of that strategy.

In changing portfolio composition and improving credit quality, the discipline of credit must be strong (this includes in the arenas of commercial loan origination, loan portfolio monitoring, and credit risk modeling of course). Consistency, especially, in the application of policy is key. Early on in the change/execution process there will be strong pressure to revert back to the old ways and stay in a familiar comfort zone.  Credit criteria/underwriting guidelines will have indeed changed in the strategy execution.

In the coming blogs we will be discussing:

• assessment of the current state in your loan portfolio;
• development of the specific strategy to effect change in the portfolio from a credit quality perspective and composition;
• business development efforts to affect change in the portfolio composition; and 
• policy changes to support the strategy/vision.

This post is a feature from my colleague and guest blogger, Barry Timm, Senior Process Architect in Advisory Services at Baker Hill, a part of Experian.

2008 has proven to be an unbelievably challenging year for the economy as a whole, let alone the financial industry.  Never before have we experienced the type and degree of turmoil that we did in 2008, even since the “Great Depression”.
 

These economic challenges have been quick, severe and widespread; and, from large corporations to the individual consumer, all have been impacted to some degree.  The stock market is down, unemployment up, consumer confidence down, delinquencies up ….not exactly a pleasant roller coaster ride. 
 

And, there is no longer any projecting as to when the “bubble” is going to burst.  It happened.   Decreased real estate values have occurred not only in high impact geographic regions but throughout the country.  While home equity products have traditionally been the “golden child” of consumer loan product offerings, recent economic changes have caused a shift in that perspective.  As a result, tightened underwriting standards have limited the availability of the product as a whole.  In some markets the product offering has even been temporarily halted.
 

We frequently hear the terminology “bailout” being used in the news.  While we all have expectations as it relates to the bailout approach, I thought I would “Google” the word “bailout” to see what would magically appear.  Interestingly enough, the first listing was titled “Walk away from your home”, with a link to the home page for a mortgage default legal team.  This is not exactly what I was expecting to find, but is definitely reflective of the times.
 

And, according to the FDIC, there have been 25 failed financial instituions in the year 2008.  This single year number equates to the total number of failed financial institutions between the prior periods 2001 through 2007. 

Okay … enough doom and gloom.  In spite of all that has occurred within the economy, some financial institutions continue to maintain a strong credit quality position in their consumer portfolios and have maintained profitability throughout all of the market volatility.  

What are the strong survivors doing that differentiates themselves from the others?

1. They understand their portfolio.  
Advisory Services frequently assists clients with various types of portfolio management analysis and often presents those findings to senior management.  We often hear that management is surprised by the results of that analysis. The point is that high-level management reporting is not enough these days. Additional detail and depth are necessary. 

More specifically, as opposed to evaluating payment performance at the portfolio level, it is important to consider the following:

• Do you know your delinquency numbers at the product level? 
• How do delinquencies compare to your product approval rates? 
• Do you routinely compare approval/decline rates and delinquencies to scorecard results and/or credit bureau scores?  
• Do you know where pricing exceptions are being made and are you receiving sufficient return for the level of risk?

2. A focused strategy is in place.
It is important to re-emphasize the specific, strategic direction and focus of your defined market.  Now is not the time to be “pushing the envelope” and extending into untested waters.  There is something to be said about focusing on your strengths, staying within your defined footprint and meeting the needs of your core, proven line of business while following sound financial risk management.

3. The underwriting process is under control.
This does not automatically mean that a “tightening” of underwriting standards is necessary.  It does mean, however, that stronger attention to detail is warranted.  It is important that underwriting criteria is reviewed and that you are sure that defined underwriting practices are consistently applied.  As noted in item number one above, this may require digging a little deeper and reviewing current and past decisioned loans (preferably with a critical eye of an independent third party).  Assessing the underwriting process becomes increasing complex and more critical with a decentralized underwriting approach.

Focus on the positive
Now that 2008 is behind us, let’s continue to focus on the positives to come in 2009.  Reflect on the past, but strive to center your attention on ongoing portfolio monitoring, financial risk management assessments and improvements for the future. 

 

What is porfolio risk management? It is the active and effective oversight of the current client base with the intent of:

• Maximizing client retention –LOVE
  • Everyone wants to retain clients and deepen relationships!
• Maximize cross-sell opportunities –LOVE
  • Again, everyone wants to retain clients and deepen relationships!
• Minimize loss potential due to credit risk issues –HATE
  • No one wants credit issues to develop!
• Minimize loss potential due to operational risks –HATE
• Maximize profitability through timely identification of risk and appropriate allocation of capital –LOVE / HATE

• Which clients are likely to need additional products and services?
• Which clients have a high potential of leaving your financial institution?
• When do you shift from client retention to credit risk management?
  
   

The debate continues in the banking industry -- Do we push the loan authority to the field or do we centralize it (particularly when we are talking about small business loans)?

A common argument for sending the loan underwriting authority to the field is the improved turnaround time for the applicant. However, reality is that centralized loan authority actually provides a credit decisioning time almost two times faster than those of a decentralized nature.  The statistics supporting this fact are from the Small Business Benchmark Study created and published by Baker Hill, a Part of Experian, for the past five years.

Based upon the 2008 Small Business Benchmark Study, those financial institutions with assets of $20 billion to $100 billion used only centralized underwriting and provided decisions within 2.5 days on average. In contrast, the next closest category ($2 billion to $20 billion in assets) took 4.4 days.

Now, if we only consider the time it takes for decisioning (meaning we have all the information needed), the same disparity exists.  The largest banks using solely centralized underwriting took 0.8 days to make a decision, while the next tier ($2 billion to $20 billion) took an average 1.5 days to make a decision.  This drop in centralized underwriting usage between these two tiers was simply a 15 percent change. This means that the $20 billion to $100 billion banks had 100% usage of centralized underwriting while the $2 billion to $20 billion dropped only to 85% usage. Eighty-five percent is still a strong usage percentage, but it has a significant impact on underwriting turnaround time.

The most perplexing issue is that the smaller community banks are consistently telling me that they feel their competitive advantages are that they can respond faster, have consistent account management and they have better relationship management practices than bigger, impersonal banks.  Based upon the stats, I am not seeing this competitive advantage supported by reality.  What is particularly confusing is that the small community banks, that are supposed to have better relationship management, take twice as long overall from application receipt to decision and almost three times as long when you compare them to the $20 billion to $100 billion category (0.8 days) to the $500 million to $2 billion category (2.2 days).

As you can see - centralized loan underwriting processes work.  They are consistent, provide improved customer service, improve throughput, increase efficiency and improve credit quality when compared to the decentralized underwriting approach. 

In future blogs, I will address the credit quality component of loan underwriting processes.
 

We have been hearing quite a bit about the ponzi scheme that was created and managed by Bernie Madoff.  Almost $50 billion dollars was taken from those that were considered to be sophisticated and definitely not the typical type to be scammed.  So, what created the environment that allowed such large sums of money to be lost in such a basic con game as a ponzi scheme?  I believe there are a few basic factors that prompted these seemingly sophisticated people to invest in this ill-fated “investment.”

• A strong desire to generate investment returns when the typical channels were not delivering.
• The reputation(s) of the existing client list -- If they invested why shouldn’t I? 
• The thought that if it paid off with smaller dollar investments, just think what could be made with larger dollars!

Hmmm!  Sounds like how we got ourselves into today’s credit situation.  Basically, we were distracted by the items noted above and ignored the warning signs. 

Putting the items above into credit industry terms it can be summed up as follows:

• We have to continue to grow and we are pressured to find more opportunities.  If we go lower in the credit quality spectrum, it can generate immediate volume from the existing application volume.
• Other financial institutions have gone into this type of lending and they aren’t showing any signs of significant distress in their portfolios.  We need to do the same.  (Everyone in the herd in favor of this action please respond by saying “Moo.”)
• Our test portfolio has performed acceptably, so let’s increase the volume.

Let’s continue the correlation between these two “problems.”  In the Madoff ponzi scheme, there were warning signs that cropped up - some earlier than others. These included:

• In 2000, the Securities and Exchange Commission received a letter from an outside money manager which warned of a possible scheme.
• In 2005, the Bostonian submitted an 18-page document to the SEC citing 29 red flags and indicated some level of corruption within Madoff’s investment company. 
• The SEC’s own earlier investigation conducted in 1999, included an acknowledgement that they had received “credible allegations” but these allegations were ignored.

So, what were the signs that were in front of us but we simply chose to ignore?

• Were the portfolios turning over so fast that we could not actually gather statistically valid data to support performance?
• Since we were selling off the loans, either individually or in bulk, did we ignore the actual risk that was taken by the industry? 
• Were we appropriately monitoring the portfolio growth and performance, utilizing risk reduction and risk avoidance techniques, doing regular rescores and tracking potential behavioral issues?

Whether the signs were visible to us or not, the fact remains that they existed in the past and they will likely exist in the future.  As we continue to clean up the mess of our past, we need to consider a few items:

• What we did in the past will no longer be acceptable going forward. We must change. We must improve.
• Regulatory pressures will increase and changes will continue to be made. 
• We will not have the luxury of time to respond to these pressures and/or changes. We must act now.

What is a financial institution to do?  Well, the worst thing we can do is wait for the regulators to tell us what to do because that is simply too late.  We need to act and act now.

• Assess the risk management methods that were employed in the past and determine deficiencies. Note the gaps between the historical tools and data sources compared with the updated credit decisioning tools and sources available in the industry.
• Develop a plan for implementing the new risk reduction methods and tools. Determine the estimated lift and manage/monitor your performance against your estimates.
• Don’t forget about the new additions to the portfolio. Once you have the existing risk identified, you should make the appropriate adjustments to the product risk parameters and terms and conditions to improve the overall quality of the new portfolio.

Overall, the worst thing that we can do is nothing. 

Remember,

“Those who do not remember the past are condemned to repeat it.”
George Santayana, a philosopher, essayist, poet, and novelist