Retail Lending Examination Procedures

Glossary

Acquirer, Acquiring Member, or Merchant Bank — – A bank, financial institution, or other MasterCard or Visa member that maintains the merchant relationship and receives all credit card transactions. Sometimes referred to as the acquiring bank.

Adaptive Control System — – Adaptive control systems are credit portfolio management systems designed to reduce credit losses and increase promotional opportunities. Adaptive control systems include software that allows management to develop and analyze various strategies that take into account the customer behavior and the economic environment. See Champion/Challenger Strategies.

Add-on — – Additional service and credit products sold in connection with a credit account. Examples are travel clubs, disability insurance, credit life insurance, debt suspension insurance, debt cancellation insurance, and fraud alert programs.

Advance Rate — – In financing consumer purchases, the amount that an institution advances in the form of a loan in relation to the value of the underlying collateral. For example, for new automobiles, the advance rate may be calculated based on the vehicle invoice or the manufacturer’s suggested retail price (MSRP).

Adverse Selection — – A disproportionately high response or acceptance rate to a marketing offer by high-risk customers in the targeted population. This situation generally occurs because the product or promotional design is flawed.

Affinity Program — – A credit card program issued by a bank in conjunction with such organizations or collective groups as professional or trade groups, college alumnae associations, and retiree associations. The issuing bank generally compensates the sponsoring organization on some type of ongoing basis in return for access to its membership.

Agent Bank — – A bank that, by agreement, participates in another bank’s card program, usually by turning over its applicants for bank cards to the bank administering the card program and by acting as a depository for merchants.

Allowance for Loan and Lease Losses (Allowance) — – A valuation reserve that is an estimate of uncollectible amounts (inherent losses), and that is used to reduce the book value of loans and leases to the amount that is expected to be collected. The allowance is established and maintained by charges against the bank’s operating income, i.e., the provision expense.

Application Scoring — – The use of a statistical model to objectively score credit applications and predict likely future performance.

Attrition — – The closing of accounts. All retail credit loan products undergo attrition, but the term is most commonly applied to credit card accounts. "Prepayment" is used more often to describe attrition in closed-end retail credit products.

Balance Transfer — – The transfer of an outstanding credit card balance from an account at one financial institution to an account at another institution. The receiving institution usually processes the transfer, but the consumer may effect the transaction by using convenience checks written on the receiving institution.

Bank Identification Number (BIN, VISA)/ Interbank Card Association (ICA, MasterCard) — – A series of numbers used to identify the settling banks for acquiring and issuing credit card transactions. These identifiers are a component of the customer account number embossed on credit cards.

Bankcard Association — – Visa and MasterCard are bankcard associations. In order to be a member of the associations and to offer their credit card services, the member must be a bank or thrift. The associations specifically define membership rights, privileges, and obligations.

Bankcards — – General purpose credit cards bearing the MasterCard or VISA brands.

Broker — – An individual or company that sources customers for loans and then places those loans with financial institutions for funding.

Buy Rate — – The interest rate the bank charges for loans purchased through third-party dealers. Used in indirect lending.

Captive Finance Company — – The financing arms of the automobile manufacturers such as Ford Motor Credit Company.

Cash Collateral Account — – A credit enhancement common in asset-backed security structures. The cash collateral account is held in a segregated trust account, funded at the outset of the deal, and can be drawn on to cover shortfalls in interest, principal, or servicing expense for a particular series if the excess spread is reduced to zero.

CEBA Credit Card Bank — – A special-purpose credit card bank chartered under the auspices of the Competitive Equality Banking Act (CEBA) of 1987. Such banks may engage in only consumer credit card lending and may accept deposits only to secure those accounts or in amounts greater than $100,000. These banks typically have a nonbank holding company parent and are often affiliated with a retailer. While they often issue private label cards, they may also issue general-purpose bankcards.

Champion/Challenger Strategy — – A process employed to determine the most effective way of managing existing accounts. Usually driven by behavioral scores, the ”champion“ strategy is applied to the majority of the accounts, while various ”challenger” strategies are applied to smaller portions of the portfolio. The results of the challenger strategies are compared against those of the champion to determine whether to install a new champion. Champion/challenger strategies are used extensively in the collection area for all types of retail loans, and for ongoing account management functions for open-end credit.

Chargeback — – A dispute procedure initiated by the card issuer after the receipt of the initial presentment from the acquirer. The issuer may determine that, for a given reason, the transaction was presented in violation of the rules or procedures and is eligible to be returned to the acquirer for possible remedy.

Chronology Log — – A chronological record of internal and external events relevant to the credit function.

Cobranded Card Program — – A bankcard program issued in conjunction with another company, usually bearing the logo of the other company. The program is generally associated with some type of partner rebate or other value-added incentive to the customer.

Coincident — – Refers to end-of-period delinquencies and losses in relation to total as of the same date. Distinguished from vintage, lagged, and other time series measures.

Consumer Credit Counseling Service (CCCS) — – Nonprofit agencies that counsel overextended consumers, and funded by bank ”fair share” contributions (a negotiated percentage of the consumer’s payment to the bank). CCCS entities work with the consumers and their banks to develop a budget and a debt repayment plan. Banks generally offer concessions to customers in CCCS programs.

Consumer Reporting Agency — – Any entity which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.

Convenience User — – A credit cardholder who pays the outstanding balance in full by each payment due date.

Corporate Card Program — – Credit card programs offered to companies, small businesses, and government entities to facilitate company travel (“travel and entertainment“ cards) and procurement. Ultimate liability varies by contract, but companies often provide some type of guarantee in the event of cardholder abuse or nonpayment.

Credit Bureau — – A credit reporting agency that is a clearinghouse for information on the credit rating of individuals or businesses. The three largest credit bureaus in the United States are Equifax, Experian, and Trans Union.

Credit Report — – Report from a credit bureau providing a customer’s credit history. Credit reports are convenient and inexpensive with larger users paying lower rates. Mortgage lenders usually require more thorough and detailed credit reports. A merged credit report obtains files from the three major credit bureaus.

Credit Scoring — – A statistical method for predicting the creditworthiness of applicants and existing customers.

Cross-Selling — – The use of one product or service as a base for selling additional products and services.

Dealer — – The retail outlet for automobile or manufactured housing sales. Dealers take loan applications from their customers and ”shop“ them to various financial institutions for approval and funding.

Dealer Reserve — – Bank-controlled, dealer-specific deposit accounts used to accumulate the difference, when applicable, between the interest rate paid by borrowers on indirect installment loans and the rate at which the bank purchased the contracts from the dealers (see Buy Rate). Collected funds are released to the dealers per the terms of the dealer agreements.

Debt Burden Ratio — – Measure of the consumer’s ability to repay a debt. One common measure includes the debt-to-income (D/I) or debt service ratio, which measures monthly debt obligations against monthly income.

Debt Cancellation Contract — – A loan term or contractual arrangement modifying loan terms under which a bank agrees to cancel all or part of a customer’s obligation to repay an extension of credit from that bank upon the occurrence of a specified event.

Debt Service — – A measure of a consumer’s income in relation to committed debt payments.

Debt Suspension Agreement — – A loan term or contractual arrangement modifying loan terms under which a bank agrees to suspend all or part of a customer’s obligation to repay an extension of credit from that bank upon the occurrence of a specified event.

Deferral — – Deferring a contractually due payment on a closed-end loan without affecting the other terms, including maturity, of the loan.

Extension — – Extending monthly payment on a closed-end loan and rolling back the maturity by the number of months extended. The account is shown current upon granting the extension. If extension fees are assessed, they should be collected at the time of the extension and not added to the balance of the loan.

Fee Pyramiding — – When fees result from the imposition of other fees. For example, when posting a late payment fee on a credit card account causes the account to exceed its credit limit and to incur an over-limit fee.

Five Cs of Credit — – Term used to describe the evaluation criteria typically used in a judgmental credit decision: character, capacity, capital, collateral, and conditions.

Fixed Payment Programs (or "Cure" Programs) — – Also described as workout programs, these include Consumer Credit Counseling Services (CCCS) and in-bank programs designed to help customers work through some type of temporary or permanent financial impairment. Cure programs typically involve a reduced payment for a specified period of time and may also include interest rate concessions.

High-Side Override — – A denied loan that meets or exceeds the established credit score cutoff. To compute a bank’s high-side override rate, divide the number of declines scoring at or above the cutoff score by the total number of applicants scoring at or above the cutoff.

Independent Sales Organization (ISO) — – A third-party company that contracts with banks to acquire or service merchants.

Inherent Losses — – The amount of loss that meets the conditions of Statement of Financial Accounting Standards (FAS) 5 for accrual of a loss contingency (i.e., a provision to the allowance). The term is synonymous with ”estimated credit losses,” which is used in the ”Interagency Policy Statement on the Allowance for Loan and Lease Losses,” issued on December 21, 1993.

Interchange — – A portion of the discount fee (percentage of each transaction) paid by merchants on bankcard transactions. Interchange fees are established by the bankcard associations (MasterCard and VISA), based in part upon the type of merchant and the method of transmission from the merchant (i.e., online or off-line). The fee takes into account authorization costs, fraud and credit losses, and the average bank cost of funds.

Issuer — – The institution (or agent) that issues a credit card to the cardholder, sometimes referred to as the issuing bank.

Lagged Analysis — – Analysis that minimizes the effects of growth. Lagged analysis uses the current balance of the item of interest as the numerator (e.g., loans past due 30 days or more), and the outstanding balance of the portfolio being measured for some earlier time period as the denominator — generally six months or one year ago.

Low-Side Override — – An approved loan that fails to meet the scoring criteria. To compute the low-side override rate, the number of approvals scoring below the cutoff score is divided by the total number of applicants scoring below the cutoff.

Loss Mitigation — – Techniques of collecting loans used to reduce or eliminate the possible loss.

Managed Assets — – Total balance sheet assets plus all off-book securitized assets.

Merchant Authorization — – An issuing bank’s approval of a credit card transaction in a specific amount. If a merchant complies with bankcard association rules in obtaining an authorization, usually by telephone or authorization terminal, payment to the merchant is guaranteed.

Negative Amortization — – An increase in the capitalized loan balance that occurs when the loan payment is insufficient to cover the interest and fees due and payable for the payment period.

Open-To-Buy — – The difference between the outstanding balance and the credit limit on credit card accounts. The total amount of committed and as yet unfunded credit available to borrowers is a contingent liability.

Pay-Ahead — – The application of excess payment amounts to the next consecutive payment(s). As a result, the customer will not be required to make payments until the amount of the overage has been extinguished. For example, if a customer’s automobile payment is $200 per month and the customer remits $600, the next payment will not be due until the third subsequent month. This practice is generally discouraged unless prearranged (to cover payments during vacations, for example). Excess payments should customarily be applied to the principal balance, thus reducing the number of total payments rather than interrupting the regular payment stream.

Payment Holiday (or Skip-A-Pay) — – Programs giving the financial institution’s most creditworthy customers the option of foregoing or skipping payments for a given month. Interest continues to accrue for the skipped time period. These programs are sometimes offered as frequently as twice a year, and usually coincide with summer vacations, August/September back-to-school shopping, or December holidays.

Penalty Pricing — – Increased loan or line finance charge imposed when a borrower fails to pay as agreed, based on performance criteria in the loan or cardholder agreement.

Periodic Rate — – The finance charge expressed as a percentage that is applied to the outstanding balance of an open-end loan for a specified period of time, usually monthly.

Point of Sale (POS) — – Where a customer engages in a retail transaction.

Prescreen (or Preapprove) — – To score or otherwise qualify a list of names or defined credit bureau population using credit bureau information with the intent of making a firm offer of credit to those passing the criteria.

Price Points — – The price tiers which banks segment retail portfolios. Price points show both rates and outstandings in each tier. Especially important when teaser rates are offered, price points enable banks to model past, present, and future revenue and the impact of shifts that result from pricing strategies. Some banks identify three tiers, such as low-rate teasers, medium-rate standard products, and high-yield loans; credit card issuers might analyze up to 50 price points.

Private Label Credit Card — – Credit cards issued for use at a single retailer.

Procurement Card Programs — – Charge cards issued to facilitate corporate procurement. Balances on such cards are due in full each month or cycle.

Promise to Pay — – A term used in collection departments to describe customers who have been contacted regarding their delinquent accounts and have committed to remitting a payment. Once the payment is received, it would be reported under "promises kept."

Re-age — – Returning a delinquent, open-end account to current status without collecting the total amount of principal, interest, and fees that are contractually due.

Renewal — – Underwriting a matured, closed-end loan generally at its outstanding principal amount and on similar terms.

Repossession — – Seizure of collateral securing a loan in default.

Residual Value — – Anticipated value or fair market value of an asset at the expiration of a lease.

Reissue — – To issue new bankcards replacing those that have expired or will expire for qualified cardholder accounts.

Revolvers — – Credit card customers who pay less than the full outstanding balance on their accounts each month (so that the account “revolves”).

Rewrite — – Underwriting an existing loan by significantly changing its terms, including payment amounts, interest rates, amortization schedules, or its final maturity.

Roll Rates — – Roll rates measure the movement of accounts and balances from one payment status to another (e.g., percentage of accounts or dollars that were current last month rolling to 30 days past due this month).

Rollover — – Carrying forward a portion of an outstanding balance on a credit card holder’s account from month to month.

Secured Credit Card — – Bankcards secured at least in part by deposit accounts held at the issuing bank or at a designated correspondent bank. The credit limit is often based on the amount of cash collateral provided.

Securitization — – The process of creating an investment security backed by credit card receivables or loans.

Settlement — – The process by which acquirers and issuers exchange financial data and value resulting from sales transactions, cash advances, merchandise credits, etc.

Spread Account — – The most common form of securitization credit enhancement, a spread account carries reserves to absorb credit losses. The spread account generally equals two to three times the expected losses in the package of receivables/loans. It is initially “seeded” (funded) by the selling bank. These advances are usually expensed to achieve treatment as sales under regulatory accounting procedures (RAP). Excess servicing income is deposited into this account each month until it is fully funded and the seed money is repaid to the selling bank. The securitization trustee controls the account.

Stress Testing — – Analysis that estimates the effect of economic changes or other changes on key performance measures (e.g., losses, delinquencies, and profitability). Key variables used in stress testing could include interest rates, score distributions, asset values, growth rates, and unemployment rates.

Sum-of-Cycle (SOC) Reporting — – This type of reporting aggregates amounts based on their payment or billing cycle dates rather than opting for the point-in-time reporting used in end-of-month (EOM) reporting. The benefit of this type of reporting is the ability to compare performance of accounts with different cycle dates on equal terms — e.g., the total current vs. delinquent accounts as of the close of business on the payment due date.

Teaser or Introductory Rate — – A temporary interest rate offered by open-end credit lenders to consumers as an incentive to open an account with their institutions. The teaser period generally lasts anywhere between three months and one year, and interest rates offered have been as low as 0 percent. Customers revert to the standard rate pricing after the introductory period.

Third-Party Vendors — – Any third party that performs a function or provides a service on the bank’s behalf. While generally associated with outsourcing, equipment and supply providers are also considered third-party vendors.

Trailing Documents — – Refers to documents not yet received, in process, or otherwise incomplete in the real estate lending process.

Transactor — – Credit card customers who pay their balances in full each month.

Travel and Entertainment Card Programs — – Charge cards (balances due in full each month/cycle) issued to facilitate corporate travel and entertainment.

Vintage Analysis — – Grouping loans by origination time period (e.g., quarter) for analysis purposes. Performance trends are tracked for each vintage and compared to other vintages for similar time on book.

Previous: Vintage Next: References