FICO

What were some of the most interesting risk analytics topics last year? Judging from the views on the FICO Blog, risk professionals are keenly interested in new ways to approach risk analytics. Here were the top 5 posts of 2017 in the Risk & Compliance category: US Average FICO Score Hits 700: A Milestone for Consumers Author Ethan Dornhelm explained, “We have pulled the latest FICO Score distribution information based on a snapshot of millions of US consumers’ credit data as of April 2017, and can report that consumer credit health and responsibility continue to be strong! For the first time since we’ve been tracking these stats, the average national FICO Score reached the 700 threshold — some 10 points above what it was just prior to the recession in October 2006.” Read the full post. Millennials and Credit: Are We Missing the Real Story? Andrew Jennings dug into data to explore whether we’re really seeing Millennials turn away from credit. “Compared with 10 years ago, today’s 18-24 year olds have lower credit and store card balances, and while they have more auto loans, the value of these loans did not grow as much as inflation would suggest,” he wrote. “By contrast, growth in student loan debts outpaced inflation, being both greater in number as well as balances; this undoubtedly creates a drag on capacity for other forms of consumer credit.” Read the full post. A New Way to Score Credit Risk – Psychometric Assessments Can you score people who don’t have a credit history using their responses to a questionnaire? Yes, and psychometric risk analytics could expand credit in markets worldwide. Explained author Campbell Scott, “The scoring methodology was developed by EFL Global and marketed by FICO as part of our FICO Financial Inclusion Initiative, designed to open up credit markets around the world to a larger number of unbanked and underserved consumers. The EFL credit risk score is created through a dynamic behavioral design and psychometric assessment that analyzes character traits with a proven relationship to credit risk. It’s an ideal approach for applicants who do not have a credit history and therefore cannot be scored using traditional methods.” He shared the characteristics scored by EFL: Read the full post. 2017 Banking Regulatory Predictions—Brace for a Sea Change Daniel Nestel’s predictions for 2017 involved the Congressional Review Act, cybersecurity legislation, disparate impact and TCPA relief. About the latter, he wrote, “The Federal Communications Commission has not provided much relief for those seeking legal clarity when using modern technology to communicate important non-telemarketing messages to customers’ mobile phones (e.g., fraud alerts) in accordance with the 1991 Telephone Consumer Protection Act (TCPA). Under Chairman Tom Wheeler’s leadership, FCC actions have been widely criticized as further chilling the use of text and automated messaging preferred by many consumers. However, change is on its way with the departure of Wheeler on January 20, 2017, the eventual confirmation of two new FCC commissioners and a much-anticipated decision by the DC Circuit on the industry’s appeal of the FCC’s most recent TCPA guidelines.” Read the full post and see Daniel’s most recent post on this topic, “What’s Happening While We Wait for TCPA Reform?” Using Alternative Data in Credit Risk Modelling This was one of the hot topics from our EMEA risk management forum in 2017, where Manish Gandhi presented an overview of what people are doing with transaction data, telecom data, social profile data, clickstream data, audio / text data and more. He also shared a chart from a project FICO did for a personal loans origination portfolio. “The traditional credit characteristics captured more value than the alternative data characteristics (with the alternative data capturing about 60% of the predictive power), and there was a high degree of overlap between the two. However, by combining the traditional and alternativ

Last year, my regulatory predictions offered little suspense. The winds of change were howling and it was clear that the New Year would be dramatically different than previous ones for those in the U.S. financial services industry. The surprise election of Donald Trump led to a 180-degree course correction of the regulatory agenda that bankers and compliance professionals had grown accustomed to in the wake of the financial crisis. 2017 was highlighted by a series of Executive Orders calling for comprehensive reviews of existing regulations, a series of reports issued by the U.S. Department of the Treasury accompanied by recommendations for significant regulatory reforms, and major changes in leadership (and vision) at many of the federal banking agencies. Also, I wrote about the more than dozen regulations which were rolled back as a result of a rarely triggered statute, the Congressional Review Act. Now, with much of the dramatic shift in the U.S. regulatory landscape complete, we are moving to the next stage, which will focus more on efforts to adopt regulatory reform. Below are a few predictions to watch for in the upcoming twelve months. 1. Bipartisan Dodd Frank Reform Will Become a Reality Bipartisanship on Capitol Hill?  Sounds like a fantasy but look no further than the recent Senate Banking Committee passage of the Dodd-Frank Act regulatory reform bill. While there have been more wide-sweeping proposals introduced in Congress during the past six years, this bill provides a range of changes to the 2010 law that include providing relief to small and mid-size banks. With 10 Republicans and 11 Democrats co-sponsoring the legislation, there is enough support to clear the challenging 60-vote threshold that is needed to get controversial bills through the Senate. Despite a deep partisan divide, look for this bill (perhaps with a few additional tweaks) to make it to the finish line in the first quarter of 2018. 2. A Decision by the DC Circuit Will Spark the Beginning of Much-Need TCPA Changes I admit that I made the same prediction in 2017 and we are still waiting for the United States Court of Appeals for the District of Columbia to issue its decision in the industry’s appeal of the 2015 FCC Telephone Consumer Protection Act (TCPA) Declaratory Ruling and Order.  While a court decision is long overdue, does anyone believe that it won’t be issued in 2018? Once a decision is made the real work will begin. I expect industry to focus on any remaining grey areas that are not resolved by the DC Circuit.  Special attention will be directed to ensuring that unnecessary barriers are removed that prevent customers from receiving important messages via their mobile phones. The new FCC leadership is expected to lead the way in fostering important reforms in this area. It may not be fully completed in 2018 but substantive work will commence during the next 12 months. 3. The Time for Housing Finance Reform Will (Finally) Arrive Policy leaders have been talking about the need for housing finance reform since the government was forced to infuse Fannie Mae and Freddie Mac (GSEs) with $187.5 billion and place the two entities into conservatorship nearly a decade ago. To date, a bipartisan reform proposal has yet to gain any momentum in Congress. So what might change in 2018? A little-known impact of the recently forged tax deal.  Fannie Mae and Freddie Mac hold billions of dollars of “deferred tax assets” on their balance sheets. These assets include items like credits that can used to defray tax bills in future years.  However, the tax reform legislation reduces the corporate tax rate and, in doing so, the value of these deferred tax assets will tumble. As a result, in the beginning of 2018, it is expected that both Fannie and Freddie will have to take another draw from the Treasury. This pending development may have jumpstarted new bipartisan efforts to craft a solution in the Senate, a draft proposal is reported to include a simplified app

“The more things change, the more they stay the same.” That 1849 quip from Jean-Baptiste Alphonse Karr somehow seems fitting for today’s cybersecurity industry. In 2017 we saw massive change in the speed, creativity and magnitude of attacks — yet the industry plodded along on important issues such as timely data breach disclosures. Taking both ends of the spectrum into account, my cybersecurity predictions for 2018 involve cyber scores, 2FA and bio hacks. 1. Your Company’s Cyber Score Will Be as Important as Its Credit Rating In an interview with TechRepublic a few days ago, Gartner research director Jeff Wheatman said, “It's no longer just about understanding whether a company you're going to do business with is credit-worthy, we need to understand what their security posture is, because it's going to have an impact on our security posture.” TechRepublic added: “Historically, organizations would go to credit rating agencies and find out the creditworthiness of their partner, but now that companies are handing out data to their partners, they need to understand what their posture is. As a result of this, we've seen a big uptick in the market for security rating services, he [Wheatman] said.” Exactly! In 2017 FICO has seen a surge in adoption of our Enterprise Security Score, as both cyber insurance providers and their corporate customers recognize the value of an objective measure of cyber security risk. In 2018, I predict that the awareness and usage of enterprise cyber scores will skyrocket. Just as retailers like Costco and Walmart hold their vendors to high standards in logistics and inventory control, in 2018 we will see vendor contracts being terminated, or just allowed to expire, due to the measured level of cyber risk, as encapsulated in independently generated cyber scores. 2. Two-Factor Authentication Will Become Nearly Ubiquitous Although the word “ubiquity” may have gone out of fashion (along with a lot of other buzzwords from the dot-com era), it’s an accurate description of how two-factor authentication will really take off in 2018. 2FA isn’t new, but as a component of the multi-factor authentication required by the PCI standard, it’s set to become much more prevalent before it gets replaced by something newer or better. The reality is, two-factor authentication is extremely effective. With stolen login credentials being a dime a dozen on the dark web, a well-implemented 2FA renders them nearly worthless. Expect to see rapid expansion of 2FA in both consumer applications, as well as fronting access to data and resources in the workplace. 2FA won’t solve all of our security problems, but it’s a relatively inexpensive solution that takes a big bite out of issues related to user authentication. And users don’t yet seem too annoyed by the extra step. 3. We’ll See Our First Biometrics Hack in 2018 It’s true that my predictions blog for 2017 included the ominous statement, “Biometric security data may become the biggest security vulnerability of all.” I still believe that, now even more with the mainstreaming of biometric security measures like the iPhone X’s Face ID facial recognition. The same iPhone X recently unlocked itself for two different women, illustrating the inherent fallibility of biometric authentication techniques. But the confusion of two human beings is not the only problem. The more menacing problem is that as leveraged for security applications, biometrics are nothing more than the stored digital interpretation of a biological feature, which is then associated with your account credentials. Those digital files can be spoofed, stolen or simply rearranged to point to a digital identity other than your own. Sure, it’s difficult. But at one time it was considered difficult to counterfeit a magnetically encoded check or credit card. Biometrics are neither fool-proof nor fraud-proof. And when someone replaces the digital interpretation of your retina with their own, and does a sufficient job covering thei