Quarterly Update: The Default Risk Index


Date: January 24, 2018

Bankcard Lenders: The Only Consumer Lending Category to Increase Risk Slightly in Q2 2017 over the Previous Quarter

VantageScore Solutions, LLC, developer of the VantageScore® credit scoring model, recently announced the quarterly update to its Default Risk Index (DRI) data series. The VantageScore DRI tracks the amount of default risk assumed by lenders in four U.S. consumer-loan categories: mortgage, bankcard, auto loans and student loans.

The update, which encompasses lender activity for the second quarter of 2017, is located in interactive infographics at DefaultRiskIndex.com and in a spreadsheet containing the full data series, which is available for download at the site.

Changes to specific index values are summarized in the following table:

VantageScore Default Risk Index: Update Summary, Q2 2017

CATEGORY
TOTAL ORIGINATIONS
TOTAL ORIGINATIONS
vs. LAST QUARTER

PROBABILITY OF DEFAULT
(weighted avg.)

DEFAULT RISK INDEX
DRI vs.
LAST QUARTER

Auto $159.09 B 7% 4.02 91.2 -8%
Bankcard $85.36 B -6% 2.84 101.1 4%
Mortgage $410.56 B 27% 1.06 91.4 -5%
Student $23.67 B 7% 18.61 90.0 -4%

The aforementioned update reflects three key points:

  • Default Risk Index: The risk profile of new auto, mortgage and student loans tightened slightly in the quarter. The DRI for bankcard lenders, however, increased slightly for the second consecutive quarter to 101 (albeit at lower volumes). This is the first time since mid-2006 that the DRI value for any category has passed 100.1
  • Quarterly Snapshot: The second quarter may prove, in hindsight, transitional. Every type of lender either tightened on risk or volume, with only student lenders tightening on both. With reports of consumer delinquencies rising, it will be important to track this trend.
  • Originations: The second quarter was a mixed story for originations. Auto lenders reversed the trend and increased volumes 7% versus last quarter. Bankcard lenders, however, continued a slow march to lower volumes. Mortgage originations grew 27% over the prior quarter but fell shy by 8% of the same quarter last year

1Each risk profile is indexed to the beginning of the series, where the third quarter of 2013 equals 100. DRI profiles that are close to 100 show an equivalent risk activity to the 2013 benchmark, whereas DRI profiles that are further from 100 distinguish risk activity that is either higher or lower than the benchmark (depending on the results).

About the Default Risk Index

The VantageScore Default Risk Index (DRI) and its website, DefaultRiskIndex.com, permit users to monitor the shifting quarterly risk profiles of loan originations in the mortgage, credit card, auto and student loan categories. The DRI is derived using credit file data from TransUnion and VantageScore odds charts — tables furnished to VantageScore users that match values on the 300-850 VantageScore scale range with their corresponding probability of default (PD) values.

The Default Risk Index is a measure of relative changes in risk level, benchmarked against the third quarter of 2013, the first period for which data were compiled. Interactive tools at DefaultRiskIndex.com allow users to view trends for each loan category and freely download the data from the charts.

The VantageScore Default Risk Index is provided as a free resource to institutional and individual investors, professionals in the securitization field, academics and all others interested in systemic lending risk. It will be updated quarterly, with data reflecting loans issued in the preceding quarter.

VantageScore Solutions and TransUnion developed the DRI to highlight limitations in the traditional ways credit scores are used to evaluate risk for categories or pools of loans. Today’s common practices — using “weighted average” or “distribution by score band” to summarize risk — are mathematically flawed. Reliance on those metrics can result in a miscalculation regarding the true credit quality of a loan pool as well as obscuring meaningful trends and leading a well-intentioned analyst to the wrong conclusions.

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