The ability to pay provision continues to be one of the biggest compliance hurdles of the Credit CARD Act. Many lenders have approached this as a purely “check-the-box” task, hoping to comply with minimal impact to existing processes. Instead, is it possible to not only comply, but also gain value in the process?
We’ve been working with clients to do just that—in other words, to avoid added compliance costs that don’t produce a return. Here are some recommended best practices.
- Tailor your strategy to credit lifecycle. Use lifecycle as a guide to make compliance investments where supported by a strong return. At origination, for instance, lenders can easily request consumer income directly, whether on an application, at retail point of sale or through a customer-initiated credit line increase. This cost-effective tactic is fully aligned with the spirit of the regulation. By contrast, account management decisions, such as automated line increases, present the largest challenge and require the most design. I’ll share few ideas for how to tackle this later in the post.
- Know the law. A common misconception is that lenders must check income or calculate ability to pay before making a prescreen offer. This isn't the case, as long as you have a valid post-screening procedure in place that can be used on self-reported income. Fully understanding the regulatory rules will help ensure you don’t increase compliance costs needlessly or limit yourself from pursuing permissible growth opportunities.
- Rely on sound analytics. Stick with tried-and-true risk management practices, which include the FICO® Score and a solid debt-to-income (DTI) ratio. To boost analytic insight, we’re working with clients to build models that determine whether available monthly funds are sufficient to repay a specific amount of debt and how a consumer’s risk level may change with access to incremental credit.
- Get closer to your customers. To grant a credit line increase, lenders must acquire up-to-date income information. The easiest way to get this is by building a relationship with your customers and requesting the information directly. New customer engagement technologies, like FICO® Adeptra® Mobile Services Platform, facilitate this communication using customer-preferred channels, including phone, text or email. This “opt-in” approach allows lenders to get consumer-stated income in an automated, cost-effective way that is fully compliant.
- Leverage all the data you can. An analytic approach that leverages banking relationship data can provide a reliable estimate of income based on monthly available funds. If you hold checking and savings accounts, consider leveraging that data to upsell bankcards to targeted customers. DDA information can also be used to calculate income for determining appropriate credit line increases. Lenders may also benefit from third-party providers of asset or income information.
- Improve risk management with income. Given the cost of acquiring income information, you should maximize its analytic value in multiple ways within your risk strategies so that the investment drives return. In one FICO study, a debt-to-income ratio contributed 2.55% predictive lift on top of the FICO® Score.
- Focus on cutoff areas. Income may be less likely to change decisions for consumers in high-risk and low-risk groups because other factors weigh more heavily. At score cutoffs, however, income could sway a lending decision or qualify a consumer for better terms. Thus, you may want to focus any added income investment in these areas.
To learn more, I invite you to download our Insights white paper: Building “Ability to Pay”-Compliant Growth Strategies (requires registration).