Gimme some credit………….. Factors considered in the consumer loan process

1. Gimme some credit…………..Factors considered in the consumer loan process Ben Brudnock Citizens Bank

2. Session topics • Types of Consumer Loans • Impact of recession on credit underwriting • Underwriting basics • Factors that determine loan approval • Counseling advice • Private student loan evolution • Q&A

3. Types of Consumer Loans • Mortgages • Home Equity, Home Equity Line of Credit (HELOC) • Auto – RV – Marine – Motorcycle • Student Loan (federal or private) • Payday loans • Credit Cards • Personal loans against assets

4. Impact of the recession on credit underwriting • Root cause of the recession: Mortgage defaults • 5.4 million of 45 million (12.07%) mortgages nationwide were delinquent or in some stage of foreclosure during QI 2009 • Nearly 3 million homes foreclosed on during all of 2009 (1 in 45 homes); more than 2x number in 2007 • Foreclosures expected to decrease sharply at this point due to questions surrounding GMAC and JP Morgan Chase foreclosure practices. 56,000 Chase foreclosures on hold currently • Silver lining: Possible real estate recovery; home prices could stabilize as foreclosure fears ease. Lenders more apt to renegotiate terms rather than foreclose. • Current consumer loan delinquency rate is 3.0%

5. Impact of the recession on credit underwriting • Faced with mounting losses, lenders tighten standards on new loan applications • How? • Higher minimum qualification standards (i.e. credit score, income, co-signer requirements, etc.) • Longer historical look into personal finances • Increased pricing (fees and margins)

6. Impact of the recession on credit underwriting Office of the Comptroller of the Currency (OCC), a division of the U.S. Treasury Department, publishes an annual survey of Credit Underwriting Practices. Those surveyed included 51 of the largest banks in the country with assets of $3 billion or more. 16th Annual Survey results include: Credit Underwriting Practices: Commercial Products 2005 2006 2007 2008 2009 2010

7. Impact of the recession on credit underwriting Credit Underwriting Practices: Residential Construction 2005 2006 2007 2008 2009 2010

8. Impact of the recession on credit underwriting Credit Underwriting Practices: Commercial Construction 2005 2006 2007 2008 2009 2010

9. Impact of the recession on credit underwriting Credit Underwriting Practices: Small Business Loans 2005 2006 2007 2008 2009 2010

10. Impact of the recession on credit underwriting Credit Underwriting Practices: Overall retail products 2005 2006 2007 2008 2009 2010

11. Underwriting basics Definition: Loan underwriting is the process a lender uses to determine whether the risk of lending to a particular borrower under a particular set of circumstances is acceptable.

12. Underwriting basics • Automated underwriting functions • Credit Scores • Credit History • Credit Utilization Ratio • Manual (or semi-manual) underwriting functions • Minimum income requirements • Employment history • Debt to Income ratio (DTI) • Loan to Value ratio (LTV) • Down payment • Collateral / Appraisal

13. Loan approval factors: Credit Scores • FICO or Credit Scores • Fair, Isaac and Company • Developed the algorithm used by most credit bureaus to calculate a credit score • A FICO score is the most commonly used credit rating • Credit scoring is a quick, objective & consistent method for lenders to measure the “risk” of an applicant • Scores based solely on information in consumer credit reports maintained at the credit reporting agencies (Experian, TransUnion & Equifax) • The higher the score, the lower the risk

14. Loan approval factors: Credit Scores • These percentages are based on the importance of the five categories for the general population. • For particular groups – for example, those who have not been using credit for long – the importance of these categories may vary. Source: www.MyFICO.com

15. Is there an average credit score? • According to Experian, • the current national average credit score is…. • 693 • Notes: The average credit score in PA is 705 • Experian’s credit score is called the “Vantage Score” • Scores tend to vary at each of the three credit bureaus

16. Loan approval factors: Credit history • Lenders may screen for both the length and usage of credit • Trade lines (individual credit accounts: balances, account status, date opened, credit limit, etc.) • Credit inquiries (a list of everyone who has accessed your credit report during the past two years, both voluntary and involuntary. • Public record and collection items (public record data from collection agencies and courts; info includes liens, judgments, bankruptcies and wage garnishments)

17. Loan approval factors • Debt to income (DTI) ratio • How a DTI is determined: Monthly household liabilities divided by monthly household gross income = DTI (Also known as back-end/before mortgage DTI) • Example: $3500 monthly bills / $10,000 gross monthly income = 35% DTI What’s good? DTI less than 28% What’s so-so? DTI between 28-36% What’s not so good? DTI greater than 36%

18. Loan approval factors, cont. • Income requirements • Verification of stated income • Minimum income requirements • Employment history • Length of time with current employer • Document history of full-time employment (references) • Credit Utilization ratio • Percentage of available credit currently in use • Difficult to determine the right mix

19. Loan approval factors, cont. • Down payment • Good sign of applicants ability to save • 20% of mortgage loan value can avoid PMI insurance • Property – asset appraisal • Loan to Value (LTV): loan amount / purchase-appraisal price • Interest rates on Home Equity loans are often tied to LTV percentages • Co-borrowing • Mandatory for approval when applicants have little to no credit history and/or income • Can often lead to better rates-fees compared to loans with one creditworthy applicant

20. A recipe for loan approval success • Solid credit history • No instances of adverse credit / collections for 7 years • Above average credit score • Best rates & fees for those with 725 or higher FICO • Verifiable income & low DTI • Current & prior year W2’s and DTI less than 30% • Borrow jointly • Two creditworthy co-borrowers and better than one

21. The evolution of underwriting private student loans That was then…………… Approvals often based solely on FICO Direct to consumer loans widely available to students without a co-borrower Best interest rates were lower than Prime Private loans made widely available to schools below bachelor’s degree level Originating lenders could easily securitize loans for additional funds 2007 AD

22. The evolution of underwriting private student loans And this is now…………. FICO is vital, but only part of equation Direct to consumer loans are as common as 8-track tapes and poodle skirts Interest rates are a function of higher margins Associate level & below schools have limited private loan availability Securitization market is weak for student loans; lenders still in the game can no longer “make and sell.” Remember FFELP?

23. The evolution of underwriting private student loans • School eligibility takes on new significance • Lenders establish eligible school criteria based on: • CDR thresholds • Programs of study • Geographic restrictions • Graduation rates • Retention rates • Accreditation “Whad’ya mean Faber’s not on your eligible school list?!?!?”

24. Questions and discussion Citizens Bank Education Finance 800.708.6684