Go to any industry conference and you’ll hear the almost incomprehensible statistics about the amount of data flowing online daily. Loan portfolio management data is no exception.
Just as economists have demonstrated that building new roads doesn’t reduce congestion, but simply increases the amount of drivers and miles covered, so does the ever-growing availability of information only whet loan portfolio managers’ appetite for more.
This phenomenon — which economists identify as “induced demand” — can serve both as a blessing and a curse in the financial services world. Whereas initially the main stumbling block to better portfolio analysis was a lack of available data, today the issue has become determining which data to most closely monitor — and which combinations of data will produce actionable intelligence that improves portfolio value and stability.
The correct recipe depends greatly on your credit union’s portfolio diversity and strengths. Most likely, you already have a handle on the fundamental data. But here are six loan portfolio metrics you might not be reporting on — or should monitor better or differently — that could greatly improve your understanding of how to manage and grow your portfolio.
Functionality metrics. With traditional and nontraditional competitors alike ramping up the speed of their application processes to meet consumers’ expectations for speed and ease, savvy financial institutions have realized the need to make that first step as simple as possible through the online and especially mobile channels. Many have developed “foot-in-the-door” applications that hit the sweetspot of customer expectations. They’re merely a mechanism to begin the process without the need for consumers to round up paperwork or do mental gymnastics on their outstanding loans and holdings.
Because if people aren’t willing to wade through your byzantine, non-responsive design application on their phones, your incredible terms and renowned servicing won’t matter much as they back out of the process and move to a competitor’s site. What’s the ratio of people who start the process to those who finish? Where are the sticking points? What percentage of those applications become funded? What percentage of funded loans do the consumers exercise? What’s the No. 1 cause of denials, and does that spark discussion about the audience your marketing efforts target?
Increasingly, consumers have demonstrated a desire to shop for everything — including vehicles and houses — with their smartphones. If your credit union has invested heavily in optimizing mobile lending, you must quantify the effectiveness of that investment, and change gears if necessary to make the process easier and more appealing.
Credit score migration. By now, almost every financial institution has witnessed the power of tracking credit score migration, but this bears repeating for those still lagging. Put simply, credit scores no longer can be used solely at the loan decisioning and pricing stage. That view is valuable, but offers just a snapshot of probability of default over a 6-12-month period. A better outlook is that of a rolling variable, because negative movement in credit score migration has become a key indicator of loan instability.
Monitoring credit score migration affords you not only the chance to take major action to avoid delinquencies and charge-offs, but also the ability to fine-tune your portfolio by decreasing or increasing members’ credit lines based on the risk they present.
Troubled debt restructures (TDRs). This one’s pretty straightforward: Are your policies and practices that aim to mitigate charge-offs paying off? Do certain sectors respond better than others to your adjustments? Are some indirect relationships consuming too much of your resources to properly maintain? Do some branches reap more benefits than others on the same manipulations and recalculations, based on variations in regional membership?
Identifying impaired and improved loans and measuring their progress or slippage is a necessity in today’s ever-changing lending market.
Exceptions. Finding new directions to push the envelope is the juice that fuels many lending executives. Exceptions are the laboratory of innovation in a credit union, a place to test hypotheses that promise to maximize return while better serving an often narrow portion of the membership.
But without proper data gathering, synthesis, and analysis, successful exceptions run the risk of becoming forgotten one-off occurrences — lost opportunities. And unsuccessful exceptions stand the chance of being repeated. Think of exceptions as an evolutionary tree — some hit dead ends, but others turn into weight-bearing limbs from which you can branch out further.
Charge-offs. Remember the old saying, “Those who cannot remember the past are doomed to repeat it?” Resist the temptation to shove charge-offs directly into the circular file. These provide information that’s incredibly valuable for calculating your loss given default and probability of default. Be sure that your financial institution uses the same loan fields in your charge-off paperwork as in your standard loan paperwork, so the data can be compared apples to apples.
Product-specific measurements. Consider metrics that only relate to auto loans, such as indirect dealer performance ratios. Or credit cards, such as what percentage of accounts have never been activated, credit line utilization, and average balance.