1
???????????????????????? SYMPOSIUM ON
CREDIT REPORTING AND RETAIL SME FINANCE
?? Sponsored by?????? The Peoples Bank of
China?????? International Finance Corporation
2007?6?20-21? ???? 20-21 June 2007
Tianjing, China
2
????????????????????? HOW TO USE CREDIT
BUREAUSTO DO BETTER MORTGAGE LENDING

• ??? By
• ?????????????? N??????
• N. KokularupanConsultant, Housing Finance Group,
  International Finance Corporation

??????????,????????????? Views expressed in this
paper are that of the author and does not
represent the views of IFC
3
?? INTRODUCTION

• ????? What is Credit Reporting
• - ????????????????????? Process of
  gathering, sharing and distributing information
  regarding performance of financial relationships
• ????????????? Credit Reporting can fall under
• (a) ???? Credit Bureaus
• (b) ???????? Credit Registries
• ????????????????????? Operational differences
  between a Credit Bureau and a Credit Registry

4
????????? ATTRIBUTES OF A CREDIT INFORMATION
SYSTEM

• ?????????????
• Contains both negative and positive information
• - ??? Trust
• - ???????? Reliable and comprehensive data

5
??????? CREDIT REPORTING AGENCIES IN USA

• ???3????? USA 3 major credit reporting
  agencies namely
• - Experian?Equifax?TransUnion
• Experian, Equifax and Trans Union
• - ????? Private Companies

6
???? CREDIT SCORES

• ?????????????? Numbers calculated to measure
  risk of delinquency or default
• ???????????????????? Used by most mortgage
  lenders in US to rank borrowers
• ????????????? Determine borrowers qualifications
  for a loan
• ???? Quantum of loan
• ???? Mortgage rate

7
??????????? GROWTH IN USE OF CREDIT SCORES

• ???????????? Increasing use of credit scores
  results from
• ???? Technological advances
• ???? Risk-based pricing
• ???????????????? Increasing direct consumer
  access for credit scores

8
?????? CONSUMER CREDIT REPORT

• ???????????????? Contains factual record of
  individuals credit payment history
• ???????? Generally covers 4 broad areas
• ?????? Identifying information
• ????????? Credit information on all accounts
• ???? Public records
• ???? Inquiries

9
?????????????? MORTGAGE LENDING AND THE USE OF
CREDIT BUREAUS

• ???????????????????????? Mortgage lenders face
  pressures such as need to achieve profitability,
  comply with complex regulatory framework and
  competition
• ?????????????????????????????????????????
  Mortgage lenders underwriting policies will
  reflect institutions appetite for risk, level of
  profits and its market segmentation
• ????????????,?????????????? Credit scoring models
  have predictive power, thus enabling lenders to
  assess the likelihood of default
• ??????????????????,??????????????,???????????
  Increasing number of borrowers have benefitted
  from the speed and accuracy provided by the use
  of Credit Scoring Models and automated
  underwriting

10
??????????????(?)MORTGAGE LENDING AND THE USE OF
CREDIT BUREAUS (Continued)

• ???,?????????????????????????? In US, mortgage
  lending and mortgage finance industry experienced
  decades of development
• ??????????????????????,???????????????????? As
  residential mortgage industry develops in China
  useful to review the US model to suit the current
  institutional legal and regulatory arrangements
  in China
• ??????????????????????????????,???????????????????
  ??????????????? Consumer credit reporting played
  and plays a crucial role in every facet of US
  mortgage lending. Not easy to establish an
  advanced system of credit reporting in China
• ?????????????????????????????????????,???????,????
  ????????????????????? Housing requires money from
  banks and investors. Need to develop
  securitization of mortgage loans in China and
  securitization requires accurate credit models to
  measure risks embedded in mortgage backed
  securities

11
??????????????? CONSUMER CREDIT SCORE AND
MORTGAGE CREDIT SCORE RISK

• ?????????????????3? Main mortgage risk factors
  are grouped under 3 categories
• ????? Borrower Characteristics
• ???? Loan Characteristics
• ????? Collateral Characteristics
• ????????,???????,??????????????????? All are
  static variables which could change the relative
  importance of risk factors over time

12
???????????? MODELLING TOTAL RISK OF MORTGAGE

• ??????????? Prepayment Risk versus Credit Risk
• ???????????,???????????? Mortgage contract
  terminates on default or prepayment of the loan
• ??????????????2??? 2 types of risk from
  mortgage investors perspective
• (a) ???? Default risk
• (b) ?????? Prepayment risk

13
???????????? (?) MODELLING TOTAL RISK OF MORTGAGE
(Continued)

• ?????????????? Borrower prepays for following
  reasons
• ?????????? Market mortgage interest rate has
  declined
• ????????????????(???????),?????????????? House
  owner has accumulated substantial home equity and
  wants to borrow larger amount of money than
  unpaid principal
• ????????????? Change in the economic or
  demographic conditions in the household
• ????????????????? In Asian countries - debt
  avoidance culture
• ???????????? Default is more difficult to
  comprehend
• ???? Triggered by
• ?????? Negative home equity
• ??????? Stressful family events divorce etc.
• ??? Lay off from work
• ????????????? Swings in business or cut in salary
  for fixed wage earners

14
???????????? (?) MODELLING TOTAL RISK OF MORTGAGE
(Continued)

• ???90????????????????????,????????,???????????
  ?????????????????????????Prior to 1990s manual
  underwriting slow process and limited ability
  to analyze risk factors involved and price loans
  based on risk factors. Disadvantageous to
  borrowers with excellent payment track record
• ??,????????????????????????????????????????????
  Now, powerful tools such as credit risk models
  and automated underwriting make it easier for
  mortgage lenders to assess and manage credit risk

15
????????/???????????? ISSUES IN USING CREDIT
BUREAUS

• ???????????????????????,??????????,???????
  Increased reliance on credit scores in lending
  decisions, especially by mortgage lenders have
  raised the following issues
• (a) ?? Cost
• (b) ???? Access
• (c) ??? Consistency
• (d) ??? Accuracy