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					             US CONSUMER CREDIT RISK
               Trends and Expectations
                          FIRST QUARTER 2012




A Survey by the
Professional Risk
Managers’ International
Association


April 2012




                              w w w. P R M I A . o r g




                                                         PRMIA thanks our survey sponsor


                                                              FICO             TM
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                      ACKNOWLEDGEMENTS

                                                                  The Professional Risk Managers’ International
                                                                  Association (PRMIA) is a higher standard for risk
                                                                  professionals, with 65 chapters around the world
                                                                  and over 80,000 members. A non-profit, member-
                                                                  led association, PRMIA is dedicated to defining
                      and implementing the best practices of risk management through education including
                      the Professional Risk Manager (PRM™) designation and Associate PRM certificate;
                      webinar, online, classroom and in-house training; events; networking; and online
                      resources. More information can be found at www.PRMIA.org.




                    FICO
                                                         FICO (NYSE:FICO) delivers superior predictive analytics
                                                         that drive smarter decisions. The company’s groundbreaking
                                                   TM    use of mathematics to predict consumer behavior has
                      transformed entire industries and revolutionized the way risk is managed and products
                      are marketed. FICO’s innovative solutions include the FICO® Score — the standard
                      measure of consumer credit risk in the United States — along with industry-leading
                      solutions for managing credit accounts, identifying and minimizing the impact of fraud,
                      and customizing consumer offers with pinpoint accuracy. Most of the world’s top banks,
                      as well as leading insurers, retailers, pharma businesses and government agencies rely
                      on FICO solutions to accelerate growth, control risk, boost profits, and meet regulatory
                      and competitive demands. FICO also helps millions of individuals manage their personal
                      credit health through www.myFICO.com. FICO: Make every decision count.



                                                                                          PRMIA would like to extend
                                                                                          special appreciation to The
                                                                                          Center for Decision Sciences
                      at Columbia Business School for their assistance in analyzing the survey responses. The
                      Center for Decision Sciences brings together scholars from a range of fields who share
                      an interest in human decision making. The center facilitates research and understanding
                      on consumer behavior, the implications of decision making on public policy, and the
                      neurological underpinnings of judgment and decision making. The center is housed
                      within Columbia Business School, widely acknowledged as being among the world’s
                      top business schools. To learn more, visit http://decisionsciences.columbia.edu.




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                                 EXECUTIVE SUMMARY


            F
                   or the past two years, PRMIA and FICO have conducted a quarterly survey of
                   bank risk professionals regarding their predictions for the next six months and
                   the impact of current events on their field. The survey asks risk managers about
            consumer credit supply and demand, credit standards, delinquencies and other issues
            related to consumer credit. During the first quarter of 2012, risk management profes-
            sionals polled offered similar responses to those given in the first quarter of 2011,
            expressing optimism regarding the overall financial picture of the next six months.
                  The most striking findings revolve around delinquency predictions. This quarter,
            more respondents believe delinquencies will decline than was the case last quarter.
            This is true for every type of credit. This reverses the beliefs observed in Quarter 2,
            Quarter 3, and Quarter 4 of last year, when many predicted an increase.

            Key findings and predictions about the next six months:
            I   Many (64.8%) feel that the level of mortgage delinquencies will decrease or stay the
                same, 11.3% more than last quarter.
            I   Most (67.7%) believe that the level of credit card delinquencies will decrease or stay
                the same.
            I   Most (51.2%) feel that the level of student loan delinquencies will rise, down 16.2%
                over last quarter.
            I   Over half (59.2%) expect that the average credit card balance will increase.
            I   The majority of respondents believe the supply of credit will satisify consumer
                demand for all credit types except residential mortgages.
            I   Nearly half (49.2%) believe that the current generation of homeowners no longer
                considers their mortgages to be their most important credit obligation.
            I   Over half (53.1%) believe that the housing market will be stronger at the end of the
                year than it was at the beginning of the year.




                                                           A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S   3
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                                                         S U R V E Y D E TA I L S


                                   KEY FINDINGS AND ANALYSIS

                       Respondents View Levels of Delinquencies Optimistically

        Looking at the industry as a whole, over the next six months, do you expect: (check all that apply)


              The level of residential mortgage
          delinquencies (of 90 days or more) to                                                              Increase significantly
                                                                                                             Increase somewhat
                      The level of home equity
                          line delinquencies to                                                              Stay about the same
                                                                                                             Decrease somewhat
       The level of credit card delinquencies to                                                             Decrease significantly


         The level of auto loan delinquencies to



                     The level of small business
                          loan delinquencies to


                      The level of student loan
                              delinquencies to

                                                   0%    10%        20%        30%         40%        50%



                  For the first time in the last year, risk management professionals feel optimistic that the level of
              delinquencies in five categories will either stay the same or decrease, a huge reversal of previous
              sentiment. The only exception is student loans, and even the pessimism in that category is less
              severe than it was last quarter.
                  Beginning with mortgage delinquencies, only 35.3% expect an increase, down more than 11
              percentage points since last quarter’s survey. Similarly, only a third (33.1%) expect increases in
              home equity line delinquencies, compared to 44.3% last quarter. Credit card delinquency predictions
              also show less (32.3%) predicting an increase compared to last quarter (44.6%). Last quarter we
              noted that the credit card delinquency prediction was most concerning, as over the past quarters
              (Quarter 2 and Quarter 3 2011) the number of respondents predicting an increase had risen 14.3%.
              The responses here for Quarter 1 seem to reverse this trend, however optimism regarding decreases
              in credit card delinquency has not reached the same level it was at in Quarter 1 2011, when 36.3%
              expected a drop. However, given that in Quarter 2 2010 only 9.1% expected a drop in these
              delinquencies, these current numbers are a hopeful sign.
                  Results regarding the level of small business loan delinquencies as well as auto loan delinquencies
              show the same trends as the first three categories. Our last category, student loan delinquencies,


 4   T H E P R O F E S S I O N A L R I S K M A N A G E R S ’ I N T E R N AT I O N A L A S S O C I AT I O N
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                                                 S U R V E Y D E TA I L S

            shows that risk managers are still cautious regarding this area, as most (88.8%) expect levels of
            student loan delinquencies to rise or stay the same.
               Overall, delinquency predictions appear markedly changed compared to Quarter 4, painting a
            more optimistic future in terms of delinquency predictions.

                     In Consumer Credit, Most See an Improving Situation
      Looking at the industry as a whole, over the next six months, do you expect: (check all that apply)


                       Interest rates for
                     consumer credit to


       The approval criteria for common
             credit and loan products to

                The average balance on
                 credit card accounts to
                                                                                                   Increase significantly
                   The volume of credit/                                                           Increase somewhat
                    loan applications to
                                                                                                   Stay about the same
                                                                                                   Decrease somewhat
         The aggregate amount of credit
             requested by consumers to                                                             Decrease significantly


             The approval rate of credit/
                    loan applications to

               The amount of consumer
            credit extended by lenders to

                                            0%   10%    20%       30%         40%        50%        60%

               In consumer underwriting, a very positive story emerges. The majority (57.7%) look for
            interest rates on consumer credit cards to remain the same, while 4 out of 5 (82.2%) look for
            consumers to carry a higher average balance over on their credit cards over the next six
            months. In other words, respondents believe that while balances will be going up, a knee-jerk
            reaction by companies to raise rates out of fear of loss will likely not occur. In a related find-
            ing, over half (55.9%) look for the amount of credit requested by consumers to increase, with
            approval rates and criteria staying about the same as they presently are. Only slightly less
            than 10% (9.6%) believe that the volume of credit and loan applications will decrease over
            the next six months.
               Overall the underwriting predictions of this quarter gives a much more optimistic impres-
            sion than in previous quarters in 2011. This optimism was observed to some level in previous
            Quarter 1 surveys, however coupled with the delinquency results, 2012 shapes up to be a bet-
            ter year, prediction wise, than 2011 or 2010.


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                                                         S U R V E Y D E TA I L S



                 Consumers Seek More Credit, Delinquencies Will Stay the Same
         Looking at the industry as a whole, over the next six months, do you expect: (check all that apply)




                                                                                                               Increase significantly
                       The number of existing
                       customers who request                                                                   Increase somewhat
                        credit-line increases to
                                                                                                               Remain the same
                                                                                                               Decrease somewhat
           The total number of delinquencies
            (of 90 days or more) on consumer                                                                   Decrease significantly
                           lending products to


           The number of new delinquencies
            (of 30 days or more) on consumer
                           lending products to


                                                   0%     10%        20%         30%         40%         50%




               Predictions of the industry in general show a majority of respondents predicting an increase in
               credit-line increase requests (55.8%). This is higher than previous predictions which showed an
               equal number of respondents predicting increase as those predicting that the amount of credit
               line increase requests would stay the same. Also reversing a trend from previous surveys, a
               plurality of respondents now believe that the total number of delinquencies, as well as the
               number of new delinquencies, will stay about the same (48% and 39.8% respectively). About 1
               in 5 believe that these delinquencies will actually decrease over the next six months (18.1% and
               23.3%, respectively). This further provides evidence of increasing confidence in consumers’
               abilities to take on and handle debt effectively over the next six months.




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                                                     S U R V E Y D E TA I L S



                 The Outlook on Small Businesses Becomes More Positive
                  Looking at the industry as a whole, over the next six months, do you expect:



             The aggregate amount of credit
            requested by small businesses to




             The approval rate of credit/loan
        applications from small businesses to



             The amount of credit extended
              to small business by lenders to


                                                0%      10%       20%        30%        40%         50%        60%        70%


                                                        Increase significantly
                                                        Increase somewhat
                                                        Remain the same
                                                        Decrease somewhat
                                                        Decrease significantly


              The PRMIA/FICO surveys in Quarter 2, Quarter 3, and Quarter 4 of 2011 found that
          respondents’ attitudes toward small business growth had cooled substantially since Quarter
          1, however Quarter 1 of 2012 appears to reverse this trend in a few subtle ways. In Quarter 4,
          most respondents (63.6%) felt that small businesses would request more credit over the next
          six months, whereas in Quarter 1, 76.4% felt that credit requests will increase. Similar to
          Quarter 4 of 2011, nearly half (48.2%) feel that the approval rate of these requests will stay
          the same, with only 15.1% believing that the criteria will become more stringent. Finally, 84.1%
          of respondents predict that the amount of credit extended to small businesses by lenders will
          increase or stay the same, compared to 77% in Quarter 4.
              While these numbers are optimistic, it should be noted that they are strikingly similar to
          Quarter 1 in 2011, when 84.2% of respondents felt that small businesses would increase their
          credit requests, and 88.7% predicted the amount of credit extended to small businesses
          would increase or stay the same. Therefore, while the numbers presented are overall
          optimistic, it may be that financial conditions inherent to most first quarters influence
          these responses significantly.




                                                                 A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S   7
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                                                                                 S U R V E Y D E TA I L S


           Historical Analysis
           Over 8 quarters, a variety of trends have been noted by the PRMIA survey. These include:

           I   Optimistic “peaks” in Quarter 1 2011 and Quarter 1 2012 (the present survey), when delinquency
               prediction estimates saw between 18% and 35% (depending on loan type) predicting decreases in
               delinquencies.


           Mortgage Delinquencies                                                                Home Equity Delinquencies

                                                                                         26%
           26%                                                                                   26%
           24%                                                                                   24%                                                                      23.1%
                                                                                                                                                  22.2%
           22%                                                                                   22%                               20.9%
           20%                                     18.1% 18.3%                                   20%
                                                                                                                    17.5%
           18%                                                                                   18%                                                                  18%
                                           15.1%                         14.8%
           16%                                                                                   16%                           16.4%
                                 13.4%                                                                                                                 16.2%
           14%                                                                                   14%
            12%        10%                                                       12.7%           12%
           10%                                                                                   10%           10%
               8%                                                                                 8%
               6%                                                                                 6%
               4%                                                                                 4%
               2%                                                                                 2%
               0%                                                                                 0%
                       Q2 2010           Q4 2010             Q2 2011         Q4 2011                      Q2 2010           Q4 2010          Q2 2011            Q4 2011
                                 Q3 2010           Q1 2011             Q3 2011         Q1 2012                      Q3 2010        Q1 2011             Q3 2011            Q1 2012

                Mortgage delinquencies –                                                               Mortgage equity deliquencies –
                percent of respondents expecting a decline                                             percent of respondents expecting a decline




           Credit Card Delinquencies                                                             Auto Loan Delinquencies

           40%                                                                                    40%                                   37.2%
                                                   36.3%
            35%                                                                                   35%
                                                                  31.4%                                                                              32.1%                 30.4%
           30%                                                                         26.9%      30%
                                                                                                                      24%
            25%                  23.4%                                    22.8%                   25%                                                         21.1%
                                               20.7%                                                                               22.4%                              21.9%
           20%                                                                                    20%
                                                                                 21.3%
            15%                                                                                   15%
                                                                                                            15.4%
           10%                                                                                    10%
                           9.1%
               5%                                                                                  5%

               0%                                                                                  0%
                       Q2 2010           Q4 2010             Q2 2011         Q4 2011                       Q2 2010            Q4 2010            Q2 2011         Q4 2011
                                 Q3 2010           Q1 2011             Q3 2011         Q1 2012                       Q3 2010           Q1 2011             Q3 2011         Q1 2012

                    Credit card delinquencies –                                                         Auto loan delinquencies –
                    percent of respondents expecting a decline                                          percent of respondents expecting a decline



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     Small Business Loan Delinquencies
     40%                                                                                                        I   The predictions regarding mortgage
                                            36.2%
     35%
                                                                                                                    and home equity line delinquencies
                                                                                   30%                              have hit an all-time high in regards to
     30%                                                  28.1%                                                     those who believe these will decrease
     25%                                                                                                            (26% and 23.1% respectively). While
                        18.5%                                               20.5%                                   Quarter 1 does have a certain allure to
     20%                               20.6%
                                                                                                                    respondents, the overall trend in both
     15%                                                        16.6%                                               of these categories has been turning
     10%          11.5%                                                                                             more optimistic over the last 8
                                                                                                                    quarters.
      5%

     0%                                                                                                         I   Whereas Quarter 3 & Quarter 4 of 2010
              Q2 2010             Q4 2010           Q2 2011           Q4 2011                                       saw about a third (33.3% and 32.5%
                        Q3 2010           Q1 2011             Q3 2011           Q1 2012                             respectively) predicting credit card
           Small business loan delinquencies – percent of respondents expecting a decline
                                                                                                                    balances would decrease, substantially
                                                                                                                    less predicted this decrease in Quarter
                                                                                                                    3 and Quarter 4 2011. Coupled with the
     Student Loans Delinquencies                                                                                    optimism in Quarter 1 2012, where only
                                                                                                                    17.7% expect a decrease, the trend
     18%
                                            15.4%
                                                                                                                    appears clear that respondents believe
     16%                                                                                                            that consumers will be more likely to
                                                        13.3%
     14%                                                            12.7%                                           carry a balance on their credit cards
     12%                                                                           11.3%                            than in previous years.
     10%       9.2%
                         7.6%          9.1%
      8%                                                                    8.5%                                I   For a second consecutive quarter,
      6%                                                                                                            less than 20% expect a decrease in
      4%                                                                                                            the number of consumer credit
      2%
                                                                                                                    delinquencies, a trend last seen in
                                                                                                                    Quarter 3 2010. This may reflect
      0%
              Q2 2010             Q4 2010             Q2 2011           Q4 2011
                                                                                                                    that risk managers are still cautious
                        Q3 2010             Q1 2011             Q3 2011           Q1 2012                           regarding revolving debt, resisting the
                                                                                                                    temptation to give in to the optimism
           Student loan delinquencies – percent of respondents expecting a decline
                                                                                                                    otherwise seen in Quarter 1.

     Total Loan Delinquencies
     35%
                                            29.3%
     30%
                                                         25.2%
     25%
                                       20.8%                        20.1%
    20%                 17.5%                                                     18.1%

     15%                                                                16.3%
     10%

      5%

     0%
              Q2 2010           Q4 2010           Q2 2011             Q4 2011
                        Q3 2010         Q1 2011             Q3 2011             Q1 2012

        Total number of delinquencies – percent of respondents expecting a decline



                                                                                            A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S   9
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                                                            S U R V E Y D E TA I L S



      Looking Ahead
      The PRMIA/FICO survey asks a                            Over the next six months, do you expect...
      number of topical interest questions
      each quarter, gauging risk managers’
                                                               The supply of credit for
      beliefs regarding the impact of                         residential mortgages to
      financial news and developments.
      Respondents in Quarter 1 were asked                     The supply of credit for
                                                              mortgage refinancing to
      specifically about the following:
                                                                  The supply of credit
      I   Supply and demand for a number                            for credit cards to
          of credit products. Overall, a
          majority felt that the supply of                        The supply of credit
          credit for new mortgages and                               for auto loans to
          mortgage refinancing would fall
          short of demand.                                     The supply of credit for
                                                                small business loans to

      I   However, a majority felt that the                    The supply of credit for
          supply of credit for credit cards,                          student loans to
          auto loans, and student loans
          would meet demand.                                                              0%       10%        20%        30%        40%   50%   60%


      I   Finally, reactions were mixed regard-                                                Fall significantly short of demand
          ing the supply of credit for small                                                   Fall slightly short of demand
          business loans, with slightly less
                                                                                               Meet demand
          than half (48.1%) feeling that the
                                                                                               Slightly exceed demand
          supply would fall short of demand,
          and half (51.8%) feeling that supply                                                 Significantly exceed demand
          would meet or exceed demand.




 10       T H E P R O F E S S I O N A L R I S K M A N A G E R S ’ I N T E R N AT I O N A L A S S O C I AT I O N
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   Choose the answer that best describes your sentiment.                                             I   Regarding strategic default behav-
                                                                                                         ior, many believe (45.5%) we will
                                                                                                         see an increase in these defaults in
         The number of strategic defaults                                                                2012 over 2011. However, only 10%
          on residential mortgages will be                                                               less (35.5%) believe we will see the
         higher in 2012 than it was in 2011
                                                                                                         opposite. 1 in 5 (19.2%) remain
                                                                                                         undecided.
                 The current generation of
         homeowners no longer considers
       their mortgage payment to be their                                                            I   Nearly half of respondents (49.2%)
          most important credit obligation                                                               believe that the current generation
                                                                                                         of homeowners no longer considers
      The housing market will be stronger                                                                their mortgage payment to be their
         at the end of the year than it was
                                                                                                         most important credit obligation.
               at the beginning of the year

                                                                                                     I   Half of respondents (53.1%) feel
    Reducing fraud with new technologies
          is a priority for my organization
                                                                                                         that the housing market will be
           because it is tied to improving                                                               stronger at the end of this year
                our capital reserve position                                                             than at the beginning.

                                               0%       10%          20%   30%     40%       50%     I   Finally, half of respondents (52.1%)
                                                                                                         feel that reducing fraud via new
                                                    Agree Strongly                                       technology is a priority for their
                                                    Agree                                                organization.
                                                    Undecided
                                                    Disagree
                                                    Disagree Strongly




                                                                            A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S   11
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                                  RESPONDENT PROFILE
              Your job (select most appropriate)
                                         9%


               31%                                    13.9%
                                                                          Chief Risk Officer

                                                                          Functional leader

                                                        7.3%              Portfolio/product management

                                                                          Business/risk analyst

                                                                          Other



                                 38.8%

              38.8% of respondents identified as a Business or Risk Analyst, and 9% identified as the
              Chief Risk Officer of their company. 7.3% work in portfolio or product management. A large
              percentage, 31%, indicated their job as “other”, which suggests that they may be tasked with
              multiple responsibilities involving risk management, or feel that the labels used do not
              adequately capture their work in the risk management space.


              What is your area of responsibility (check all that apply)?
              60%
                                 54.9%                                                         Card portfolio

              50%                                                                              Mortgage portfolio

                                                                  41.4%                        Auto loan portfolio
              40%                                                                              Direct deposit accounts
                                                                                               Lines of credit
              30%     27.3%
                                                                                               Student loans

              20%                             19.1%
                                                        16.7%                 14.8%

              10%


              0%

              The majority of respondents (54.9%) were trusted with managing a mortgage portfolio.
              Slightly less were responsible for lines of credit (41.4%), or a card portfolio (27.8%). This
              is extremely similar to previous quarters, suggesting that the results of this survey were
              not driven by a different response demographic.




                                                           A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S   12
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             What is the size of your                          What is the business orientation of your
             institution (by total assets)?                    institution (select the most appropriate)?

                                       6.7%                                           3.1% 1.8%
                                              3.3%                          9.9%


                                                     8.8%
                                                                   11.7%                                      39.5%

           46.3%




                                                      35%
                                                                           34.1%



                                                                  Full Service Bank
                   Up to $5 billion
                                                                  Credit Union
                   $5 – $10 billion
                                                                  Mortgage lender
                   $10 – $20 billion
                                                                  Wealth management, investments, retirement services
                   $20 – $40 billion                              Discount and/or self-serve financial services
                   $40 + billion                                  Credit Card Monoline



              Finally, 35% work at companies with more than $40 billion dollars in assets, with slightly
              less than half (46.3%) working at a smaller firm (up to $5 billion in assets). A large majority
              (73.6%) work in either a full service bank or wealth management / retirement / investment
              services group, while 1 in 10 works as a mortgage lender (9.9%) or in a discount or self-
              service financial firm (11.7%). Finally a small number work in a credit union (3.1%) or credit
              card monoline (1.8%).


              What is the geographic reach of your institution?

              Slightly less than half (41.8%)                                            16.3%
              worked with a firm that oper-
              ated on a global level, and a                                                  3.8%
              quarter of the respondents
                                                       41.8%                                                  Global
              (27.2%) worked at a firm with                                                       10.9%
              national reach. A small                                                                         National
              minority (3.8%) worked at an                                                                    Regional
              internet-based firm, and 1 in                                                                   Local
              10 (10.9%) worked at a firm
                                                                                                              Internet-based
              that had only local reach.                                           27.2%




                                                                A H I G H E R S TA N D A R D F O R R I S K P R O F E S S I O N A L S   13
FICO                       TM




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