understanding co-borrower performance · for lines of credit, the risk distribution is skewed to...

Understanding Co-Borrower Performance

Charlie Wise

Vice President, International Research and Consulting

| 2© 2018 Trans Union of Canada, Inc. All Rights Reserved | 2

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• What is the landscape of joint loans?

• How valuable are joint loans?

• How risky is a joint loan compared to an individual loan?

• What is our recommended best practice for assessing co-borrower risk?

In this session, we’ll review:

Why care about co-borrower performance?

Because you care about increasing opportunities while

reducing risk.


• Should you take the lowest credit score?

• How about the highest credit score?

• Maybe it’s better to average the applicants’ credit scores?

Different lenders may evaluate the risk of joint

borrower credit facilities in different ways

TransUnion set out to establish a best practice when

assessing the risk of joint applications

What is the landscape of joint loans?


The type of borrower will depend on the product,

and each joint situation will have unique circumstances

Mortgage

Co-borrower Contractually

liable

GuarantorLiable only if the primary defaults

Personal loans


liable

GuarantorLiable only if the primary defaults

Auto and Line of Credit


liable

Credit card


liable

Authorized user No joint contractual liability is present


Joint loan originations represent a significant portion

of annual originations to lenders

Source: TransUnion consumer credit database

Annual joint loan originations for key products

# o

f o

rig

ina

tio

ns

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2013 2014 2015 2016 2017

Auto Installment Line of Credit Mortgage

Joint loans as a %

of all originations26% 23%24%25% 24%

How valuable are joint loans?


Over half of mortgage originations are from

joint borrowers


Distribution of mortgage originations by borrower type

43% 41% 41% 41% 40%

57% 59% 59% 59% 60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017

Ori

gin

ati

on

dis

trib

uti

on

Individual Joint borrower


Origination amounts for joint loans continue to climb


Average mortgage origination amount by borrower type

$-

$50

$100

$150

$200

$250

$300

2013 2014 2015 2016 2017

Avera

ge o

rig

inati

on

am

ou

nt

($K

) 12%

9%



Joint mortgages are valuable; total market value is on

average 60% higher compared to individual loans


Total market value of mortgages at origination by borrower type

Mark

et

valu

e (

$B

)

$

$20

$40

$60

$80

$100

$120

$140

$160

$180

2013 2014 2015 2016 2017



The distribution of auto originations across borrower

types is relatively stable


Distribution of auto originations by borrower type

Ori

gin

ati

on

dis

trib

uti

on

82% 84% 83% 83% 84%

18% 16% 17% 17% 16%

0%

20%

40%

60%

80%

100%

2013 2014 2015 2016 2017



Similar to mortgage, joint auto accounts are bigger


Average auto origination amount by borrower type

$0

$5

$10

$15

$20

$25

$30

$35

2013 2014 2015 2016 2017

Ave

rag

e o

rig

ina

tio

n a

mo

un

t ($

K)

8%12%



Like other products, the co-borrower distribution of

line of credit originations has been stable


Distribution of line of credit originations by borrower type

70% 69% 70% 71% 71%

30% 31% 30% 29% 29%

0%

20%

40%

60%

80%

100%

2013 2014 2015 2016 2017

Ori

gin

ati

on

dis

trib

uti

on



Further proving joint borrower value, the gap in

origination amounts is significantly larger

Average origination amount of lines of credit

$-

$20

$40

$60

$80

$100

$120

2013 2014 2015 2016 2017

Avera

ge o

rig

inati

on

am

ou

nt

($K

)


147%

225%



• The landscape of joint lending has been growing and represents

significant opportunity for lenders

• There is clear potential economic value to joint loans compared to

individual loans

• Incorrect assessment of joint borrowers can lead to incorrect pricing

or missed opportunity

In summary:

Comparing joint borrower risk

Which is riskier, an individual or a joint application?


We studied 6.9 MM consumers who opened an

auto, mortgage, personal loan or LOC in 2015

t + 24 months

Metrics measured at t:

Joint vs. individual

Joint application type

Consumer score(s)

Product type

t

Product origination

Metrics measured at t+24:

Delinquency rates of

originated products


For auto loans, co-borrowers tend to have slightly

higher risk compared to other borrower types

Auto originations by risk tier

14% 17%

22%26%

14%

14%

15%

14%

35%28%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Individual Co-borrower

% o

f to

tal

ori

gin

ati

on

s

CreditVision risk score: Subprime = 300-639; Near prime = 640-719; Prime = 720-759;

Prime plus = 760-799; Super prime = 800+

29%



For lines of credit, the risk distribution is skewed

to lower risk for joint loans

Line of credit origination by risk tier



2% 2%

21% 16%

23%

17%

22%

20%

32%45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


% o

f to

tal

ori

gin

ati

on

s



3% 3%

20% 17%

19%17%

20%20%

36%43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


% o

f to

tal

ori

gin

ati

on

s



Mortgage origination by risk tier

21%

21%

Similar to lines of credit, the risk distribution of

mortgages is skewed to lower risk for joint loans



Joint performance cannot be predicted based upon

individual behavior alone

Subprime delinquency rate within 24 months – 60 or more days past due

Auto Line of Credit Mortgage

Deli

nq

uen

cy r

ate

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

CreditVision risk score: Subprime = 300-639Source: TransUnion consumer credit database


Even super prime consumers do not behave as expected

Super prime delinquency rate within 24 months – 60 or more days past due

Deli

nq

uen

cy r

ate

CreditVision risk score: Super prime = 800+

Auto Line of Credit Mortgage

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%


Co-borrower lending best practices

How should co-borrower risk be assessed?


We studied 6.9 million consumers who opened an

auto, installment line of credit or mortgage in 2015

t + 24 months

Metrics measured at t:

Joint vs. individual

Joint application type

Consumer score(s)

Product type

t

Product origination

Metrics measured at t+24:

Delinquency rates of

originated products

Delinquency mapping

Joint delinquency was

mapped to equivalent

individual observed

delinquency


500-530 531-560 561–590 591–639 640–670 671–700 701–719 720–759 760–799 800+

800+

760–799

720–759

701–719

671–700

640–670

591–639

561–590

531-560

500-530

We developed a co-borrower score equivalency

matrix for auto loans

Lowest co-borrower score

Hig

hest

co

-bo

rro

wer

sco

re

Source: TransUnion consumer credit databaseCreditVision risk score: Subprime = 300-639; Near prime = 640-719; Prime = 720-759;



500-530 531-560 561–590 591–639 640–670 671–700 701–719 720–759 760–799 800+

800+

760–799

720–759

701–719

671–700

640–670

591–639

561–590

531-560

500-530

Case one: What will the auto co-borrower

scorecard predict for two near prime borrowers?

Lowest co-borrower score: 690

Hig

he

st

co

-bo

rro

we

r s

co

re:

71

0




Observed bad rate for joint = 1.2%

Mapped equivalent score = 730

Prime


Scenario 1

Decision and price using highest

score

Joint highest score = 710

Expected bad rate at individual

score = 1.8%

Risk consumers walking from deal

How might this co-borrower situation typically be

handled?

Scenario 2

Decision and price using lowest

score

Joint lowest score = 690


score = 2.9%

Might not make risk cut-off

Scenario 3

Decision and price using average

score

Joint average score = 700


score = 2.3%

Incorrect loan amount



500-530 531-560 561–590 591–639 640–670 671–700 701–719 720–759 760–799 800+

800+

760–799

720–759

701–719

671–700

640–670

591–639

561–590

531-560

500-530

Case two: What will the auto co-borrower

scorecard predict for a subprime and a prime?

Lowest co-borrower score: 590

Hig

he

st

co

-bo

rro

we

r s

co

re:

73

0




Observed bad rate for joint = 1.6%

Mapped equivalent score = 715

Near

Prime


Scenario 1

Decision and price using highest

score

Joint highest score = 730


score = 1.2%

Pricing might be off for relative risk

How might this co-borrower situation typically be

handled?


Scenario 2

Decision and price using lowest

score

Joint lowest score = 590


score = 18.5%

Consumers miss risk cut-off

Scenario 3

Decision and price using average

score

Joint average score = 660


score = 5.7%

Incorrect loan amount


We performed the same exercise for mortgages with

similar results

Lowest co-borrower score

Hig

hest

co

-bo

rro

wer

sco

re

Source: TransUnion consumer credit databaseCreditVision risk score: Subprime = 300-639; Near prime = 640-719; Prime = 720-759;


500-530 531-560 561–590 591–639 640–670 671–700 701–719 720–759 760–799 800+

800+

760–799

720–759

701–719

671–700

640–670

591–639

561–590

531-560

500-530


• To maximize opportunity and minimize risk, co-borrowers should not be

averaged – their joint performance should be benchmarked against

individual borrower performance

• TransUnion’s recommended best practice differs based upon product

type, and of course will differ across individual portfolios

• The market for joint borrowers is large and provides significant dollar

value to lenders

• TransUnion’s recommended best practice provides a quantitatively

sound and consistent method to capture the joint loan opportunity

In conclusion:

understanding co-borrower performance · for lines of credit, the risk distribution is skewed to...

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