VantageScore Default Risk Index (DRI): A better approach to ABS metrics
This month’s announcement of the VantageScore Default Risk Index (DRI) won attention in top publications aimed at issuers of and investors in asset-backed securities (ABS), including Asset Securitization Report and Asset-Backed Alert.
Developed in partnership with TransUnion, the DRI website, DefaultRiskIndex.com, tracks quarterly origination risk in four consumer-lending categories: mortgage, credit card, auto loan, and student loan. It also demonstrates a superior approach to evaluating risk within pools of loans: Instead of the traditional—and flawed—metrics of “weighted average credit score” and “distribution by score band,” the DRI measures risk by translating VantageScore 3.0 credit scores into their corresponding probability of default (PD) values.
The DRI is derived using credit file data from TransUnion, VantageScore 3.0 credit scores, and VantageScore odds charts—tables furnished to users of VantageScore models that match values on the 300-850 VantageScore 3.0 scale to corresponding probability of default (PD) values.
As the structured finance industry incorporates the asset-level disclosures required by SEC Regulation AB II, the DRI highlights an opportunity to gain analytical advantage using credit scores. The DRI tracks “national portfolios” of consumer loans, but analysts can benefit by applying the same approach to their own portfolios and investment strategies.