Credit risk industry veterans who managed consumer loan portfolios through the Great Recession can recall the challenge of responding to swiftly changing borrower payment behavior and the resulting delinquency and default rate volatility during that time. Unable to pinpoint the sources of rapidly growing credit losses, lenders broadly and dramatically restricted access to credit by reducing new account originations, cutting unutilized exposure, and intensifying collections practices, often to the detriment of long-term growth, profitability, and customer loyalty.
Plato famously wrote, “Our need will be the real creator,” which certainly applied to the invention of the FICO® Resilience Index. FICO’s data scientists created the FICO Resilience Index – an innovative analytic designed to rank-orders consumers’ sensitivity to economic disruptions – in response to the industry's post-recession needs to more precisely identify, manage, and protect against latent credit risk in lending portfolios (i.e., risk that only manifests during periods of economic stress). FICO Resilience Index was explicitly designed to differentiate the expected performance of borrowers with similar FICO® Scores when faced with stressed economic conditions, providing a previously unavailable dimension of analytical insight.
The sudden COVID-19-driven global economic disruption that began early in 2020 provided a sharp reminder of the industry's ongoing need for insights into latent credit risk. As seen during the Great Recession, lenders again applied broad-based responses to curtail the anticipated delinquency and loss impacts, this time making much heavier use of payment accommodations such as forbearance and deferral programs.
This four-part blog series, "How to Address Portfolio Risk Volatility Through Economic Uncertainty," will help lenders understand how to embed portfolio resilience into decisions across the credit lifecycle—from customer acquisition to customer management to collections and recovery—through targeted application of the ground-breaking FICO Resilience Index. Using the FICO Resilience Index can allow lenders to keep credit flowing to their most resilient borrowers, even during periods of economic stress, while responsibly managing exposure where resilience is lower.
Consistently enhancing resilience at all key decision points can reduce credit loss volatility through different economic cycles, with compelling benefits to portfolio managers:
- Lower credit losses during economic downturns, and improved growth and credit performance during recoveries
- More accurate credit loss forecasts
- More stable credit loss allowance estimates, especially under CECL requirements that require a forward-looking view of lifetime expected credit losses
- Better stress test outcomes, supporting more efficient use of capital
Stay tuned for the first of our series in in the coming weeks, which you will find on the FICO Blog. To get more information about the FICO® Resilience Index, please visit https://www.fico.com/en/products/fico-resilience-index.
This blog is co-authored with Jim Patterson, senior director, Global Credit Lifecycle Practice - FICO Advisors