Underwriting: Assessing a clients risk profile

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Underwriting Assessing a clients risk profile
March 2006
Jennifer Rademaker
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Changes to ABILs risk assessment processes

• The Credit Bill requires some adjustments to
  ABILs scoring processes in terms of
• price ceilings
• over-indebtedness and reckless lending
  principles
• changes to the NPS Act and payment platforms
• non-discrimination clauses

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Reckless lending principles

• Key concepts from the Bill
• 1. An assessment must be made
• We may not grant a loan without assessing the
  consumers
• General understanding of the risks, costs,
  rights, and obligations of credit
• Debt repayment history
• Existing financial means, prospects and
  obligations
• 2. The consumer must tell the truth
• They must fully and truthfully answer any
  requests for information made as part of the
  above referenced assessment.
• It is a complete defence against a reckless
  lending charge if the consumer failed to tell the
  truth and, in doing so, affected our ability to
  make a proper assessment.
• 3. We must not grant a loan if the assessment
  reveals that doing so would over-indebt the
  consumer
• A consumer is over-indebted if they are unable to
  satisfy in a timely manner all the obligations
  under all the credit agreements to which they are
  a party.

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1. An assessment must be made
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2. The consumer must tell the truth

• We rely on the consumer to be truthful about
  their monthly living expenses, or non-debt
  obligations.
• There is no independent, verifiable source for
  this information.

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2. The consumer must tell the truth

• We cannot accurately assess what is a correct
  level of expenses for a consumer
• Different expense priorities
• Private school versus public school DSTV versus
  no TV
• Different patterns of expense sharing
• Roomates share or assign expenses one partner
  mainly supported by the other
• Expense information may sometimes be inaccurate
• Consumers may not feel comfortable revealing true
  expenses.
• Consumers may not remember true expenses.
• What does African Bank do?
• Branches with high percentages of consumers
  reporting low expenses are identified monthly for
  additional training around prompting the consumer
  for expense data.
• We are testing the capturing of additional income
  fields to create a more holistic financial
  picture of the consumer.
• We have adopted a belt and braces approach to
  our over-indebtedness assessment.

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3. We must not grant a loan if it would
over-indebt the consumer

• The African Bank assessment boils down to two
  major components
• A predicted risk score
• An affordability calculation
• The affordability calculation is twofold, with
  the components on a monthly basis
• The Belt
• (Existing Debt Expenses New AB loan AB
  Debts Settled) / Net Income lt 100
• The Braces
• (Existing Debt New AB Loan AB Debts Settled)
  / Gross Income lt 60
• Both conditions must be satisfied in order for a
  loan to be granted.

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3. We must not grant a loan if it would
over-indebt the consumer

• The belt and braces approach was rolled out to
  the entire African Bank Retail and Credit
  Indemnity network in December 2005.
• We initially experienced a 9 impact to sales
  volumes, which has since stabilised at a 4
  impact.

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Next Steps Reckless lending principles

• Align the rest of ABIL to the belt and braces
  approach
• Standard Bank Joint Venture March 2006
• African Bank Miners Credit May 2006
• Continue research into components of the consumer
  financial picture
• Improving expense capturing
• Assessing other sources of income and household
  financial dynamics
• Await further clarification from regulators
• The detail of our expense and income declaration
  is aligned to the components published in the NCB
  regulations for a debt review.
• To date, no definitive formula or criteria has
  been published, although the NCB makes reference
  to the future possibility of such a metric.
• Our current approach has been shared with the
  MFRC.
• Continue to lobby for more complete and accurate
  credit bureau data
• The NCB requires that the details of all credit
  agreements be listed on the National Credit
  Register. It also puts the onus on credit
  bureaus to verify the accuracy of the data.
• In the meantime, some lenders either do not
  report, report inaccurately or report
  infrequently. This interferes with an accurate
  assessment of the consumer.
• We have developed proprietary tools to screen out
  errors as far as possible.

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Changes to payment platforms

• All-banks product in existence since Oct 2004
• in anticipation of these changes
• Product uses ordinary EFT process with no
• specific arrangement with issuing bank
• Total booked to date R81 million on 11 687
• accounts

• Initial performance poor across all risk
• groups
• Performance substantially improved as
• experience gained and adjustments made to
• scoring models.

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Next Steps Payment platforms

• Refine risk segments to isolate the effect of
  payment platforms
• Continue testing and learning from All-banks
  products
• Refine affordability tests to take cognisance of
  affordability/default interplay