Kudos to the FDIC! As the financial services industry continues to deal with a wave of Dodd-Frank regulations, it is encouraging to see regulators working with industry to arrive at a better solution. The result is a newly proposed FDIC rule on deposit insurance assessment pricing among large banks. The new proposal would be a significant improvement over the current rule.
In February, the FDIC issued a final rule to implement the Dodd-Frank requirement that deposit insurance premium assessments on banks be based on each bank’s risk profile. The final rule required an assessment of that risk, and included definitions of “higher risk” consumer loans. However the definitions did not allow for continued industry reliance on credit scores in identifying the quality of assets that would factor into the new pricing formula for FDIC insurance. The banking industry expressed concern over the rule being less accurate and overly burdensome, since many lenders do not maintain data on their loans consistent with the rule’s definitions.
As a result, an industry group consisting of bankers, trade associations, credit reporting agencies, credit scoring companies and FICO, in consultation with FDIC staff, devised a method of mapping credit scores to probability of default (PD) rates for various loan products. These probability default rates would then be used to identify “higher risk” consumer loans that exceed a default level set by the FDIC. The FDIC listened to industry’s input and responded by issuing its new proposed rule, which largely adopted the new approach including the use of credit scores. We expect there will be some additional tweaks around the edges as the FDIC reviews public comments in response to its proposal. In fact, FICO submitted technical comments of our own.
With the effective date of October 1 fast approaching, we are already fielding questions from our large bank clients, many on the development of the probability default tables for the requisite consumer loan products. We are working now with our credit bureau partners to deliver these tables in advance of the compliance deadline. In the meantime, we invite lenders to contact us with their questions concerning compliance with the new rule. Watch this blog for more information on this topic in the near future.