The Federal Reserve’s decision to permit card issuers to use income estimation models to meet the Accountability, Responsibility, and Disclosure (CARD) Act requirements to assess a borrower’s ability to repay a loan makes good sense.
But are income estimation models useful for anything other than supporting compliance with this new regulation? Yes, in fact these types of models offer many advantages and uses for the financial industry. They provide a range of benefits including better fraud mitigation, stronger risk management, and responsible provision of credit. Using income estimation models to understand your members’ complete financial picture is valuable in all phases of the customer lifecycle, including:
- Loan Origination – use as a best practice for determining income capacity
- Prospecting – target customers within a specific income range
- Acquisitions – set line assignments for approved customers
- Account Management – assess repayment ability before approving line increases
- Collections – optimize valuation and recovery efforts
One of the key benefits of income estimation models is they validate member income in real time and can be easily integrated into current processes to reduce expensive manual verification procedures and increase your ROI.
But not all models are created equal. When considering an income estimation model, it’s important to consider the source of the income data upon which the model was developed. The best models rely on verified income data and cover all income sources, including wages, rent, alimony, and Social Security.