CFPB Small Dollar Loan Rules: A Deep,
Deep Dive
A B I L I T Y TO R E PAY P L AY B O O K F O R
THE CFPB RULE
Dan Richard
VP Analytics & Product
Strategy, FactorTrust
[email protected]
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AGENDA
• STEPS TO ENSURE ATR COMPLIANCE
• OPPORTUNITIES TO ENHANCE DECISIONING
• STEPS TO ENSURE REPORTING COMPLIANCE
• COMPLAINCE COUNTDOWN
STEPS TO ENSURE ATR COMPLIANCE
Prepare Now To Integrate These Into Your Decision Process
• COVERED LOAN CHECK / PRESUMPTIONS OF
UNAFFORDABILITY
• Covered loans in a sequence
• More than 5 covered loans in the last 12 months
• More than 90 days of outstanding covered loans in last 12
months
Number of Covered Loans in Last Twelve Months
Volume
100%
25%
19.7%
20%
60%
15%
11.4%
40%
10%
20%
5%
0%
Some low-risk applicants become
ineligible
81.9%
18.1%
≤ 5 (Eligible)
> 5 (Ineligible)
0%
Default Rate
Volume
80%
Expected Impact
Default Rate
Plan Now
Estimate portfolio impact
Strategize how to salvage ineligible
low-risk applicants
STEPS TO ENSURE ATR COMPLIANCE
Prepare Now To Integrate These Into Your Decision Process
RESIDUAL INCOME
Expected Impact
• Net Income
Significant portion of applicants
becomes ineligible
• Major Financial Obligations
• New loan payment amount
Plan Now
• Must be sufficient to afford basic living
expenses without defaulting
Test new data sources
Estimate portfolio impact
Strategize dynamic loan optimization
Residual Income
Volume
60%
Default Rate
16.2%
16.1%
18%
16%
50%
Volume
12%
10%
30%
8%
20%
6%
4%
10%
0%
53.8%
46.2%
Negative or Zero
(Ineligible)
Positive
(Eligible)
Residual Income
2%
0%
Default Rate
14%
40%
STEPS TO ENSURE ATR COMPLIANCE
Prepare Now To Integrate These Into Your Decision Process
INCOME AND EXPENSE VALIDATION
• Ensure trustworthiness of stated information
• Varying levels of technological sophistication
Expected Impact
New required data integrity checks
Plan Now
Review available validation tools
Determine operational workflow
OPPORTUNITIES TO ENHANCE DECISIONING
Start Considering Now How Best To Adapt Your Decision Strategy
• Consumers failing early stages of a waterfall need not be screened
in later stages
Expected Impact
Applications
Additional waterfall elements
Underwriting
Plan Now
Pass
Fail
20%
80%
ATR Check
Pass
Review
Fail
9%
1%
10%
Test and optimize ATR compliance
solutions with risk strategies
OPPORTUNITIES TO ENHANCE DECISIONING
Start Considering Now How Best To Adapt Your Decision Strategy
• “Major financial obligations” include debt obligations from a
traditional credit file
• Blend traditional and alternative credit data for enhanced risk
decisioning
Debt-to-Income by Data Source Blend
Traditional DTI
Comprehensive DTI
Expected Impact
DEFAULT RATE
Improved risk-ranking
Plan Now
Test blended risk solutions
Low
Medium
DEBT-TO-INCOME
High
OPPORTUNITIES TO ENHANCE DECISIONING
Start Considering Now How Best To Adapt Your Decision Strategy
• Blend capacity and risk dimensions to fit the consumer into the
right-sized loan product
• Graduate qualified re-borrowers who trigger “presumption of
unaffordability” rules
High
Low
Risk
Residual Income
Expected Impact
Preserved pre-ATR approval rates
Improved profitability
High
Plan Now
Test risk and capacity solution sets
Design optimization matrices
Low
OPPORTUNITIES TO ENHANCE DECISIONING
Start Considering Now How Best To Adapt Your Decision Strategy
• Beware of consumer-stated income or expense values far out of
line from expectation
Stated Income Versus Twelve-Month Average Stated Income
Volume
Expected Impact
Default Rate
40%
37.5%
Reduced fraud exposure
34.4%
35%
Plan Now
29.6%
30%
26.8%
26.9%
Volume and Default Rate
25.6%
25%
Test validation rules associated with
ATR requirements
26.3%
25.8%
23.3%
22.0%
16.9%
20%
15%
10%
5%
2.0%
1.8%
0%
>3x
Lower
4.0%
6.3%
13.1%
9.0%
20.3%
10.1%
20.3%
8.6%
4.5%
3x
Lower
2x
Lower
1.5x
Lower
1.1x
Lower
Same
1.1x
Higher
1.5x
Higher
2x
Higher
3x
Higher
>3x
Higher
STEPS TO ENSURE REPORTING COMPLIANCE
• “Pull from one, report to all”
• Develop a plan for real-time reporting in multiple formats
Expected Impact
New required integrations with
Registered Information Systems (RIS)
Increased reporting burden
Plan Now
Evaluate technology solutions that
lessen the burden
COMPLIANCE COUNTDOWN
Less than 600 Days to Comply
E VA L U AT E
2016
R E M E D I AT E
2017
•
•
•
•
•
CFPB Comment
Create ATR Team
Compliance Training
Evaluate solutions
- Document retention
- Data testing
- Reporting compliance
• Assess Internal readiness for
compliance and risk
- Resources
- Documentation
- Loan products
- Strategy adjustments
• Create gap analysis
•
•
•
•
•
Select solutions from third-party
providers
Create decision models
Continue data testing
Engage RIS’
Evaluate and select assessor
Remediate gaps
IMPLEMENT
2018
•
•
•
•
Implement third party solutions
- Compliance dashboard
- Covered loan lookback
- Residual Income
- Income & expense validation
- Loan decision optimization
Continually refine decision models
Begin reporting to RIS’
Implement internal controls
QUESTIONS?