Tactical Credit Risk Consulting

Credit Line Management

Perhaps the most important decision consumer lenders make with their revolving products is the amount of credit to extend. Many lenders assign credit limits based solely on risk - with lower risk customers receiving higher amounts of credit.

PMA's approach to determining the appropriate credit limit for a customer strikes a balance between the revenues produced from customers who use their credit limit and the losses generated from those who default. If credit limits are set too low, revenues will be constrained. If credit limits are set too high, credit losses are aggravated. Our statisticians work with your historical data to optimize the credit limit decision for your business - at the point of underwriting and throughout the life of an account.

Re-pricing

Proper pricing of a portfolio requires a careful balance of risk and reward. Set the price too high and your attractive customers will take their business elsewhere. Set the price too low and profits suffer.

PMA can help you understand the trade-off between risk and reward for segments of your portfolio. By applying cutting-edge statistical techniques within a profit-focused framework we can split your portfolio into behaviorally uniform groups and target the appropriate price for each segment.

Credit Loss Forecasting

Forecasting credit losses is critically important to manage lender's risk and profit effectively. Good forecasting not only generates accurate financial expectations, but also provides a diagnostic tool to understand reasons for inaccuracies in these expectations, when they occur.

Depending upon the business objective and available data, PMA will select among a variety of established statistical forecasting methods to meet a specific forecasting need, all of which rely on a thorough understanding of historical trends. The key behavioral drivers of risk are identified and projected for meaningful customer segments such as vintage, score, and acquisition source. These key risk drivers are then used to generate a projection of expected loss dollars and rates.

When our forecast is completed, we deliver more than a single number or rate, because a single number forecast is not sufficient to manage a portfolio. We detail the assumptions our forecast is based on, so you can compare actual performance with the forecast and understand the behavioral reasons why results vary from expectations. This allows you to identify and manage specific aspects of the portfolio quickly and to bring them in line with business objectives.

Portfolio Segmentation

The critical element of effective portfolio management is identification of segments that behave similarly. Whether you are focused on managing risk or enhancing marketing effectiveness, properly segmenting your portfolio into appropriate groups can deliver extraordinary benefits.

Using sophisticated statistical techniques and a profit-oriented framework, PMA can define your portfolio in terms of a manageable number of behaviorally similar segments.

We have refined our segmentation techniques over many years, crafting an approach that allows you to tailor policy, pricing, and products that exploit the unique behaviors of each group. By managing each segment separately, our clients are better able to maximize overall portfolio profitability.

Credit Bureau Analytics

Consumer credit reports offer a rich source of information for account underwriting and on-going management. Because of the complexity and non-standard nature of these data, consumer and small business lenders face many challenges fully exploiting them.

PMA offers valuable credit bureau analytic support. Our proprietary software and our significant expertise processing and analyzing data from each of the three major credit repositories allow our clients to squeeze more information from the raw data. From each credit bureau file, our proprietary software creates thousands of attributes that capture all aspects of an individual's credit behavior. Moreover, our tightly controlled process ensures that all attributes we craft are defined and created consistently across all three bureaus.

Among our credit bureau related services are:

  • Developing credit bureau preference tables that identify the geographic regions in which each bureau provides the most cost effective decision.
  • Defining and aligning attributes for new and existing product underwriting.
  • Creating and validating scoring and consumer/small business segmentation systems.
  • Developing credit line assignment and management strategies.

Target Marketing

Acquiring desirable customers is a cornerstone of success for any business. Targeting them accurately and cost effectively is an important step where PMA's expertise can prove to be valuable.

The solution we deliver is tailored to your specific objective. Using powerful statistical techniques we identify desirable prospects who are most likely to respond to your offer, significantly reducing your marketing expenses.

Statistical Quality Control

Determining when a process is working properly can be a difficult task. Unlike a manufacturing plant where a product can be sampled for defects, defective underwriting is typically realized only in account performance, which may not manifest itself for months or years. The cost of poor process control can be large.

To address these issues, we developed a sampling method to directly assess the effects of variance in a process. Specific process steps are identified and repeated samples are drawn from historical data. The distribution in key metrics is compared to actual account performance and process tolerances are established. Output from a live process is compared to the historical distribution of key metrics. Performance outside the sampled tolerances generates a warning. Distributions and tolerances are easily updated when new historical data become available.

Loan Modification

Loan modification efforts have garnered ever increasing importance as a tool to manage distressed loan work-outs -- particularly for mortgage and home equity portfolios.  Well crafted loan modification programs balance expected lost revenue from modified loans against the reduced likelihood successfully modified loans will foreclose and default.  Designing proper targeting and modification policy requires a clear understanding of an organization’s short and longer-term strategic objectives and their loan loss reserve requirements. 

Once a program to meet the objectives is designed, controlled and carefully crafted testing is advised. Targeting models can then be crafted from the test result data to best match specific modification incentives with borrowers most likely to respond to and benefit from the offer.  PMA’s distinctive combination of expertise in risk management program design, structuring controlled testing, statistical modeling and program tracking have allowed us to provide critical support and leadership to lenders and servicers facing challenging portfolio work-out situations.