© 2010 TransUnion LLC All Rights Reserved NCRA’s 18 th Annual National Conference Industry trends, forecasts and the impact of external factors on consumer

© 2010 TransUnion LLC All Rights Reserved

NCRA’s 18th Annual National Conference

Industry trends, forecasts and the impact of external factors on consumer behavior.

FJ GuarreraVice President, Financial Services GroupTransUnion

[email protected]

© 2010 TransUnion LLC All Rights Reserved22

Session overview

• A view of industry-level data is critical, particularly in a rapidly changing, post-recession environment. It can help:

– Set realistic expectations for your business– Identify opportunities and threats in the current environment

• We will illustrate the value of industry-level data through:– An analysis of industry trends and forecasts– Examples of how external factors have impacted consumer performance

• We will analyze the issues that lenders and employers face as a result of these emerging industry…and we will present opportunities for CRA’s to assist their clients in responding to these challenging business issues

The overarching goal of this session is to provide you with industry insights that will contribute toward more substantive

conversations with your clients AND introduce opportunities to grow your business


Industry Trends



0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Q1 20

04

Q2 20

04

Q3 20

04

Q4 20

04

Q1 20

05

Q2 20

05

Q3 20

05

Q4 20

05

Q1 20

06

Q2 20

06

Q3 20

06

Q4 20

06

Q1 20

07

Q2 20

07

Q3 20

07

Q4 20

07

Q1 20

08

Q2 20

08

Q3 20

08

Q4 20

08

Q1 20

09

Q2 20

09

Q3 20

09

Q4 20

09

Q1 20

10

Q2 20

100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Ne

w B

an

kru

ptc

ies

(No

n-B

usi

ne

ss)

Throughout 2008, 2009 and the first half of this year, we have experienced the worst economic environment in recent memory

Source: Economy.com

Na

tion

al U

ne

mp

loym

en

t R

ate

Unemployment more than doubled Non-business bankruptcy returnedto pre-reform levels

$3,400

$3,600

$3,800

$4,000

$4,200

$4,400

$4,600 Retail sales dropped to 2005 levels

0

20

40

60

80

100

120 Consumer Confidence plummeted over 70%

Re

tail

Sa

les

($ B

illio

ns)

Co

nsu

me

r C

on

fide

nce

In

de

x


Source: Economy.com Source: Economy.com

Source: US Bankruptcy Courts


Card issuers are nervous due to legislative and economic pressures—however, delinquencies have been well controlled…

Ac

qu

isit

ion

Vo

lum

e

Quarter

Credit Card Statistics9

0+

DP

D In

cid

en

t De

linq

ue

nc

y R

ate

End of Quarter 90+ DPD Incident Delinquency RateTotal Quarter Acquisition Volume

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%

1.30%

1.40%

1.50%

Sources: TransUnion Credit Reporting database (G2) and TransUnion Trend Data database

…in part because consumers want to protect their available card credit—their primary source of liquidity in uncertain times.


1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

3,000,000

Ju

l-0

7A

ug

-07

Se

p-0

7O

ct-

07

No

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ec

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Ja

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r-1

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pr-

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Ma

y-1

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un

-10

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

Auto loan originations have been subdued, but 1st half 2010 seasonal increases are encouraging. Delinquency is well controlled

Monthly Auto Loan OriginationsDollar 60+ DPD Delinquency Rate

Mo

nth

ly A

uto

Lo

an

Orig

ina

tion

s

Month

Auto Loan Statistics

Do

llar 6

0+

DP

D R

ate

Source: TransUnion Credit Reporting database (G2)

Cash for Clunkers

6 © 2010 TransUnion LLC All Rights Reserved


Mortgage and HELOC originations appear to have “bottomed-out”

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

Ju

l-0

7A

ug

-07

Se

p-0

7O

ct-

07

No

v-0

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ec

-07

Ja

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un

-10

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

National Mortgage Account OriginationsNational HELOC Account Originations


In study released last week TransUnion identified a shift in what may be a driver of roll rates – the existence of a HELOCMortgage Delinquency: 30 to 60 Roll Rates

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

04/0

606

/06

08/0

610

/06

12/0

602

/07

04/0

706

/07

08/0

710

/07

12/0

702

/08

04/0

806

/08

08/0

810

/08

12/0

802

/09

04/0

906

/09

08/0

910

/09

12/0

9

60

- 9

0 R

oll

Ra

te (

U.S

.)

Entire U.S. No Home Equity With Home Equity


External Impacts on Consumer Behavior Example 1: The Payment Hierarchy Dynamic



Trends in serious delinquency rates led us to believe that a fundamental shift in payment prioritization had occurred

Quarter

Serious Delinquency Comparison

Sources: TransUnion Trend Data database and proprietary forecasting models

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Q1 2005

Q2 2005

Q3 2005

Q4 2005

Q1 2006

Q2 2006

Q3 2006

Q4 2006

Q1 2007

Q2 2007

Q3 2007

Q4 2007

Q1 2008

Q2 2008

Q3 2008

Q4 2008

Q1 2009

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Credit Card 90+ DPD Rate Mortgage 60+ DPD Rate

De

lin

qu

en

cy


This behavioral change is clearly illustrated by payment hierarchy trends—consumers paying cards before mortgages


% o

f C

on

su

me

rs

% of Consumers 30+ DPD on Mortgages / Current on Bankcards% of Consumers Current on Mortgages / 30+ DPD on Bankcards

% of Consumers 30+ DPD on Mortgages and 30+ DPD on Bankcards

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

Q2 20

07

Q3 20

07

Q4 20

07

Q1 20

08

Q2 20

08

Q3 20

08

Q4 20

08

Q1 20

09

Q2 20

09

Q3 20

09

Q4 20

09

Quarter


We can gain insight into the drivers of this dynamic—information that can then be incorporated into strategy

Sources:1) TransUnion Credit Reporting database (G2)

2) Economy.com

(A) % Current on Cardbut

30+ DPD on Mortgagea

(B) % 30+ DPD on Cardbut

Current on Mortgage1 (A)/(B) Unemployment Rate2

Home ValueDepreciation2

State Q4 2009 Q4 2009 Q4 2009 Q1 2006 - Q4 2009

Nevada 15.23% 3.3% 4.6 12.5% 57.0%

Florida 13.34% 3.8% 3.5 11.3% 45.5%

Arizona 11.57% 3.5% 3.3 9.3% 48.3%

California 10.83% 2.6% 4.2 12.5% 46.8%

Georgia 8.12% 4.1% 2.0 10.2% 25.9%

Vermont 3.56% 2.6% 1.4 6.6% 9.4%

Nebraska 3.44% 3.2% 1.1 5.0% 1.7%

Alaska 3.39% 2.8% 1.2 8.9% 18.1%

South Dakota 2.85% 3.0% 0.95 5.2% 4.0%

North Dakota 2.36% 3.0% 0.79 4.5% -8.9%

= 0.80 (statistically significant, strong correlation)

= 0.57 (statistically significant, moderate correlation)

© 2010 TransUnion LLC All Rights Reserved


External Impacts on Consumer Behavior

Example 2: Consumers are protecting liquidity



Consumers are saving more than before the recession, due in part to changes in market value and consumer financial uncertainty

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Q12004

Q32004

Q12005

Q32005

Q12006

Q32006

Q12007

Q32007

Q12008

Q32008

Q12009

Q32009

Q12010

… in response to market volatility

S&

P S

toc

k P

ric

e I

nd

ex

0%

1%

2%

3%

4%

5%

6%

Q12004

Q32004

Q12005

Q32005

Q12006

Q32006

Q12007

Q32007

Q12008

Q32008

Q12009

Q32009

Q12010

The consumer savings rate has risen dramatically since the beginning of the

recession…

Source: Economy.com

Sa

vin

gs

Ra

te

Quarter Quarter


A TransUnion survey identified segments of the population with the intent to change savings behavior. What drove that intent?

Survey Question: Do you agree or disagree with the following statement? “The way I save money will probably change once the recession is over.”

Source: A survey of 2,914 consumers performed the week of 10/12/09 for TransUnion by Zogby International

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Strongly Agree Somewhat Agree SomewhatDisagree

StronglyDisagree

Not Sure

18-2930-4950-6465+

Change in Savings Habits By Age Group


$4,500

$4,750

$5,000

$5,250

$5,500

$5,750

$6,000

$6,250

$6,500

Ju

l-0

7A

ug

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p-0

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ec

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eb

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un

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ct-

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ec

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Ja

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eb

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Ma

r-0

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un

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ug

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Ja

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r-1

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pr-

10

Ma

y-1

0J

un

-10

$115

$120

$125

$130

$135

$140

Card customers built up balances at the onset of the recession, but have worked hard to reduce those balances.

Average Debt ServiceAverage Balance per Borrower

Ave

rag

e B

ala

nce

Month

Card Statistics

Ave

rag

e D

eb

t Se

rvice


16 © 2010 TransUnion LLC All Rights Reserved


External Impacts on Consumer Behavior

Example 3: Geographic Variation in Mortgage Performance



0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Ju

l-0

7

Au

g-0

7

Se

p-0

7

Oc

t-0

7

No

v-0

7D

ec

-07

Ja

n-0

8

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Ju

n-0

8

Ju

l-0

8

Au

g-0

8S

ep

-08

Oc

t-0

8

No

v-0

8

De

c-0

8

Ja

n-0

9

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9M

ay

-09

Ju

n-0

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Ju

l-0

9

Au

g-0

9

Se

p-0

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Oc

t-0

9

No

v-0

9

De

c-0

9

Ja

n-1

0F

eb

-10

Ma

r-1

0

Ap

r-1

0

Ma

y-1

0

Ju

n-1

0


From a national perspective, mortgage delinquency has finally peaked


% 6

0+

DP

D

Month

Mortgage Delinquency% Mortgage Dollars 60+ DPD

% Mortgage Accounts 60+ DPD


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Q1

20

07

Q2

20

01

Q3

20

07

Q4

20

07

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

10


Looking closely at the markets most severely impacted, we can see differences at various levels of geographic granularity

Source: TransUnion Trend Data database

% 6

0+

DP

D

Quarter

60+ DPD Mortgage Loan Delinquency (Including Q3 and Q4 2010 Projections)

USA Nevada Las Vegas MSA


0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

07

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

10


In some areas the performance variance is significant


% 6

0+

DP

D

Quarter

60+ DPD Mortgage Loan Delinquency (Including Q3 and Q4 2010 Projections)

USA California San Francisco MSA


$0

$50

$100

$150

$200

$250

$300

$350

Q1

20

06

Q2

20

06

Q3

20

06

Q4

20

06

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

07

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

60+ DPD Mortgage Incident Delinquency RateMedian House Price ($000s)

In the Las Vegas market, we can see that mortgage delinquency increased as housing prices fell

Me

dia

n H

ou

se

Pri

ce

($

00

0s

)

Quarter

60

+ D

PD

Inc

ide

nt D

elin

qu

en

cy

Ra

te

Sources: TransUnion Trend Data database and Economy.com

55% drop


$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Q1

20

06

Q2

20

06

Q3

20

06

Q4

20

06

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

07

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

08

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

60+ DPD Mortgage Incident Delinquency RateMedian House Price ($000s)

In contrast, San Francisco house price depreciation was not as egregious, resulting in lower delinquency

Me

dia

n H

ou

se

Pri

ce

($

00

0s

)

Quarter

60

+ D

PD

Inc

ide

nt D

elin

qu

en

cy

Ra

te

Sources: TransUnion Trend Data database and Economy.com

33% drop


Business issues resulting from industry trends and the opportunity for CRA’s



In this immediate post-recession environment, there are four questions that we commonly hear from lenders nationwide

• How have average consumer scores changed as a result of the recession and is the trend continuing?

• What are best practices in managing risk within our existing portfolios?

• How can we grow our portfolio in the current economy without assuming additional risk?

• How do we respond to the Risk-Based Pricing disclosure requirements?

Each of these will be discussed in turn…


Question 1:Question 1:

How have average consumer scores changed as a result of the recession and is the trend

continuing?

© 2010 TransUnion LLC All Rights Reserved26 © 2010 TransUnion LLC All Rights Reserved26

The question is flawed! Average credit scores do not reflect average risk

ConsumerTransRisk

Score P(90+ DPD)

Consumer #1 600 5.84%

Consumer #2 600 5.84%

Consumer #3 600 5.84%

Consumer #4 600 5.84%

Consumer #5 600 5.84%

Consumer #6 600 5.84%

AVERAGE 600 5.84%

ConsumerTransRisk

Score P(90+ DPD)

Consumer #1 700 1.55%

Consumer #2 700 1.55%

Consumer #3 700 1.55%

Consumer #4 500 13.69%

Consumer #5 500 13.69%

Consumer #6 500 13.69%

AVERAGE 600 7.62%


60

80

100

120

140

160

180

Q1

-05

Q2

-05

Q3

-05

Q4

-05

Q1

-06

Q2

-06

Q3

-06

Q4

-06

Q1

-07

Q2

-07

Q3

-07

Q4

-07

Q1

-08

Q2

-08

Q3

-08

Q4

-08

Q1

-09

Q2

-09

Q3

-09

Q4

-09

Q1

-10

Q2

-10


Risk of default increased markedly both before- and over the course of the recession, but has stabilized recently


CR

I

Quarter

TransUnion Credit Risk Index

USA Florida Nevada California Arizona

Nevada: 21.5% increase

USA: 7.8% increaseFlorida: 19.2% increase

California: 18.4% increase

Only VT and NC saw decreases Arizona: 19.1% increase


CRA Opportunity: The Trend Data can help your customers identify problem risk areas based on aggregate trends

TU Trend Data Credit Risk Index, 2nd Quarter, 2010(Base = June, 1996 = 100.0)

Will insert “heat map” of US States Risk Index

teve / Amber are creating

Lower Risk (1-113 CRI)Medium Risk (114-132 CRI)High Risk (133-170 CRI)



What are best practices in managing risk within our existing portfolios?


Portfolio management continues to remain a strategic priority for mortgage lenders in and 3 key strategies have emerged

• Strategy 1: Increased use of RetroSpective Analysis–Adjust account management strategies–Adjust acquisition strategies–Leverage in regulatory audits

• Strategy 2: Increased frequency and use of Portfolio Reviews–Identify attributes of “non-performing” loans–Establish appropriate loan loss reserves

• Strategy 3: Deploy Account Management Triggers–Leverage insights gained from Retros and Portfolio Reviews–Proactively react to “at-risk” populations



How can we grow our portfolio in the current economy without assuming additional risk?


Mortgage lenders are recognizing signs of market stabilization and many are beginning to execute phased strategies for growth

• Phase 1: Utilize industry-level data to identify opportunities –Macroeconomic data, performance data, and forecasts–Identify regions to target – Look at data w/ regional granularity!

• Phase 2: Deeper segmentation analysis to target the “right” prospects at the “right” time–Identify attrition and performance of consumers with ARMs–Identify attrition and performance of consumers with HELOCs

• Phase 3: Deploy knowledge gained from exercises in phases 1 and 2 in strategic marketing “prescreen” campaigns–Incorporate New Mover Data–Incorporate AVM (Consider LTV)



How can TransUnion help us respond to the Risk-Based Pricing disclosure requirements?


The Risk-Based Pricing Rule of the FACT Act imposes policy and disclosure requirements on lenders

Applies to lenders who use credit report information to set credit terms

Requires that approved applicants be notified that their terms may be less favorable than the terms provided to consumers with better credit histories

Notices must be targeted to consumers who may be paying more for credit based on a credit report

A credit score disclosure exception permits notices to be delivered to all approved applicants

There is a timing requirement for the delivery of notices which is after approval and before consummation of the loan

Compliance is required by January 1, 2011

Scope: Applies to banks, credit unions, mortgage bankers, auto lenders, retailers and public utilities (does not apply to small business or insurance companies)


Credit Score Disclosure Exception Notice

Model Form

Source: VantageScore Date: August 16, 2010

Scores range from a low of 501 to a high of 900

Bar Graph Score Distribution Graphs



Model Form

Text Statement

Score Interval Tables

Score Percentile Ranking

Source: VantageScore Date: August 16, 2010

Scores range from a low of 501 to a high of 900

Your score ranks higher than 58 percent of U.S. consumers.


Lenders have multiple options to satisfy the Risk-Based Pricing Rule

Risk Based Pricing Rule• Applies to lenders who use

credit reports to set terms• Effective Jan 1, 2011

Risk-Based Pricing Notice

• Sent to 2/3 of approved applicants

• Permits free credit report (like adverse action notice)

• TransUnion may provide custom analytics for score cut-off


• Sent to 100% of approved applicants

• No free credit report

Bar Graph• Lender creates Exception

Notice using graph• Graphs offered for all generic

FICO®, VantageScore® and TransUnion risk-based pricing scores at no charge

• Graphs available through web site or sales representative

Text Statement• Lender creates Exception

Notice with text percentile statement (no graph)

• “Your score ranks higher than [X] percent of U.S. consumers.”

Score Interval Table• Lender creates text statement

using the table• Tables offered for all generic

FICO, VantageScore and TransUnion risk-based pricing scores at no charge

• Tables available through web site or sales representative

TransUnion Score Percentile Ranking

• Two-digit ranking delivered via online credit report

• Seven most used scores


Summary



The current economy continues to create challenges in the mortgage industry, however there are opportunities for CRA’s

• Industry data provides insights can be used to have more informed discussions with mortgage lenders

– Mortgage delinquency remains high, but we see signs of stabilization– Credit recovery will lag economic recovery, timing will vary by region– Economic stability will lead to increased acquisitions – prepare for

increased competition

• CRA’s can help mortgage lenders solve their pressing business challenges

– TransUnion’s Credit Risk Index in Trend Data can be used to show changes in consumer risk across geographies

– Retros, Portfolio Reviews and Account Management Triggers can be deployed in concert to best manage mortgage portfolio risk

– TrendData, New Mover Data and AVM’s can improve prescreen results– A Percentile Ranking can be quickly and easily deployed to help mortgage

lenders respond to the Risk Based Pricing Rules

Documents

© 2010 TransUnion LLC All Rights Reserved NCRA’s 18 th Annual National Conference Industry trends, forecasts and the impact of external factors on consumer