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Affordability Stress Testing
- Client: Established Lender
- Project Length: 1 Month
- Personnel: Partner, Consultant + Analyst
Background
The senior leadership team had considerable concerns around the cost of living increase across the UK
The key questions that required answering were:
- How to effectively revise the underwriting affordability algorithm and measure the impact of this?
- How to quantify the effects of the stress on customers already on book?
Underwriting
Vestigo reviewed the existing affordability components to highlight where any stress should be applied
The ONS-based affordability models were of particular focus, specifically assessing how accurate these would be today given the time elapsed since the survey period
Stresses were calculated based on the net inflation position (i.e. taking account of wage growth) accounting for both changes to date and future expectations
The impacts on future business (acceptance rates/maximum loan amounts) were assessed with recommendations presented back to the leadership team
Existing Customers
Each customer’s affordability position at acquisition was advanced to the current period to obtain an up-to-date view
Segments of highly stressed or ‘underwater’ customers were identified, both under a current point in time view of affordability and after applying further forecasted cost of living increases
Changes in portfolio affordability were mapped to a default risk gradient in order to understand the likely impact on arrears cases, defaults and overall book losses vs. current expectations
Vestigo calculated the potential term extensions required at a customer level in order to bring the affordability component back in line with policy to demonstrate the impact of such a solution
Outcomes
The client gained clarity on the expected changes in book dynamics due to cost of living rises both for existing customers and new lending
Tranches of “at risk” customers were identified for close monitoring
Changes to the underwriting policy/models were presented to the senior leadership team
To replace the ONS model approach, a new Open Banking based solution to accurately capture current affordability was put forward as the next step
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