iSixSigma

Y Metric for loan losses

Six Sigma – iSixSigma Forums Old Forums General Y Metric for loan losses

Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
    Posts
  • #32094

    Morpheus
    Participant

    I am working on a project to reduce loan losses (Project Y) the problem I am facing is that a loan may take up to 3 years before it ever becomes a loss. To ensure that any improvements can be verified I need to find a metric that can be monitored within a few months.
    Has anyone had any experience in using a metric that can be monitored in a shorter time frame?

    0
    #85316

    Helper
    Participant

    Morpheus,
    Wow!  What a project.  You know, I would be a bit anxious about a project that is like yours.  There are sooooo many external factors and variables that are out of a company’s control to limit loan losses.  Unless, the scoring and acceptance of D/E ratios, etc… at your company are loose, you have one hell of a Whopper! on your hands.
     
    Good luck!

    0
    #85329

    Prarthana Kulkarni
    Participant

    Please contact [email protected]

    0
    #85535

    Andhale
    Participant

    Try looking at metrics that indicate loss…like # of monthly instalments missed by various borrowers month over month…this certainly would be an indicator of the total loan losses…

    0
    #85549

    DrSeuss
    Participant

    Wow!  Sounds like you have a problem.  I might suggest that you focus your project around trying to identify the characteristics associated with successful loan and unsuccessful loans.  Then you can develop triggers to identify when a loan falls into the unsuccessful category.  Hopefully these triggers will act like warning limits.  Your real problem will be to show the correlation between the triggers and an unsuccessful loan.  Your financial risk assessment gurus should be able to help you identify quantative metrics that could be used as a potential trigger to warn of a loan going bad.  In my previous insurance world, we used performance triggers to signal when a business deal was going sour.  We would include these metrics in the contract as escape clauses for getting out of the deal.  Hope this helps…..

    0
    #85555

    Ralph Browning
    Participant

    Once you locate those indicators on the loan that decrease the profit margin, You may also setup a reporting Dashboard with Trending, as well as with the Triggers. This should better facilitate in identifying when the item is starting to go out of control. If possible, you can even tie those metrics cirectly to a specific process in the Loan Center.
     
    Good Luck with your project. It sounds like fun.

    0
    #85557

    Steve Clapp
    Member

    Predictor metrics exist for commercial and consumer loans, so let me know on which type your project focuses.  Based on your answer, I can suggest some indicators.
    Steve Clapp

    0
    #85567

    Morpheus
    Participant

    I’m focussing on consumer loans. Thanks

    0
    #85570

    Steve Clapp
    Member

    For consumer loans, some predictors of repayment performance are:

    FICO scores tracked throughout the life of the loans (higher usually means lower default rates),
    Debt-to-income ratios at the time the loans were made (higher usually means higher default rates),
    Loan-to-value scores at the time the loans were made (higher usually means higher default rates),
    Collateral mix within the consumer loan portfolio (more automobiles usually means lower default rates; more unsecured and more boats, snowmobiles, etc., usually means higher default rates), and
    Average portfolio term (longer repayment term usually means higher risk of loss).
    These are all portfolio metrics as opposed to individual loan metrics.  Therefore, you can do some control chart tracking to see if things start getting out of hand.
    Steve Clapp

    0
Viewing 9 posts - 1 through 9 (of 9 total)

The forum ‘General’ is closed to new topics and replies.