The Numbers Don’t Lie (Right?): The State of Lending and What to Trust in 2023 with Equifax’s Tom O’Neill

Rich Alterman  00:00

Welcome to the show everyone. I'm your host Rich Alterman and on this episode of The Lending Link, we're sitting down with Tom O'Neill, who is a risk advisor at Equifax when the national credit bureaus in the US and Canada for the presence of 23 other countries, Tom brings over 20 years of experience leading analytic consulting engagements within financial services and other industries. As a risk advisor at Equifax, Tom provides analytical thought leadership to clients senior management, public forums and various industries and advisory councils. Tom holds a Master's of international management from the American Graduate School of International Management and a dual bachelor of arts in psychology and philosophy from New Mexico University. In this episode, Tom and I are going to spend some time talking about current market trends and lending the current state of the economy and what lenders can do to prepare and the use of alternative data and so much more. But first, please head over to GDS Link's LinkedIn and Twitter pages at GDS link and hit those like and follow buttons. And please be sure to subscribe to the lending leak on Apple podcast, Spotify or wherever you prefer to listen to your podcast. All right, now let's get synced with GDS link. Good morning, Tom. And welcome.

Tom O'Neill  01:31

Morning. Rich, Happy to be here.

Rich Alterman  01:33

So where are you joining us from today?

Tom O'Neill  01:35

Today I am in Philadelphia, where it's always sunny, apparently are so they tell me?

Rich Alterman  01:41

Okay, well, great. I enjoy Philadelphia spend a lot of time up there. I lived in New York, Delaware for several years with American Express. So Tom, you've been in your current role at Equifax for two years, maybe spend a little time telling us about your background before stepping into your current role. As well as before starting with Equifax.

Tom O'Neill  01:57

I spent a career in the in the Bureau's so to speak, and been able to do a lot of different things within there, which is has been an adventure and a lot of fun, but all focused around helping our clients understand and utilize the data and information that we can provide to them. So for instance, credit trends, you know, what does what do those mean? What does that mean, from a risk perspective? How can we take action on those? The data itself? What's available? How can that be used in decisioning. And for a long time I was heading up optimization groups were really pushing math to the limits to say, what is the data telling us that we should use or to do to maximize our performance, given the constraints that we've got? Currently, I'm I'm in a role of risk advisor, which as the name entails, essentially, helps clients understand the environment that we're in, and what they can do proactively and even reactively in some cases, to adjust to those environments and use the information at their disposal to come out good on the other side.

Rich Alterman  03:05

So you know, one of the things I'd like to do before I kind of dig into businesses just maybe get a little more personal, you know, reviewing your LinkedIn profile, I see that from August 2015. through March of 2018, you started an operator restaurant in Virginia called the Hatched Grill. Yeah. And the description indicates it was a pay it forward restaurant, can you please share with us what it meant that it was put forward? And you know, what was your motivation for starting the restaurant again with that

Tom O'Neill  03:31

What is a paid forward restaurant after all, so as you noted, in my, my bio, I graduated from New Mexico State University. And when I was there, I fell in love with New Mexico food, which I think anyone who has taste buds, who goes to the southwest and has it, you know, is going to do and when I came up to the East Coast, and I started my career, and she has settled down here, that was one thing that was missing. So I had actually been wanting to do a for profit enterprise that had more of a community focus to it. And the more I thought about it, the more I kept coming back to this notion of a pay it forward restaurant. And what that is, is the way we had our restaurants set up someone would come in, they would order the food is kind of set up like a Chipotle or similar type thing where you go down but the line in new and you create your meal, right. And at the end, you pay for the meal and for a couple of dollars extra you can buy a certificate. And that certificate then went up on one of the walls within the restaurants and someone who could use a meal but might not be able to afford it could come down, take that certificate off the wall and exchange it for a menu item. And in turn, they get a thank you certificate, which went up on another wall in the restaurant. So cool. It was this really cool, dynamic. And really there was that whole kid forwards notion that was a bigger driver to me than actually opening up a restaurant. But I figured if I'm going to open up a restaurant, it's going to be new Mexican food. So I'm going to kill two birds with one stone to do things that I really liked. And it was wonderful. We ran it for a few years. And yeah, the, the whole paid forward dynamic was was really rewarding to see, I wasn't quite sure how it was going to work out when we started. But it worked out beautifully. After a few years, though, I realized, you know, I was I was much more interested in starting a restaurant and doing this concept than it was actually spending the rest of my career running a restaurant. So ultimately sold the restaurant and I rejoined to my previous career, which I've been back doing for four years now, five years.

Rich Alterman  05:42

Sounds like a really good cause. So real quickly, if someone said, What's the difference between New New Mexico food and Mexican food?

Tom O'Neill  05:49

I get that all the time and basically, it's the chilie's, basically, is the chilie's. Yeah, so so there's a lot of similarity between like Tex Mex, and New Mexican. So you'll get burritos you'll get, you'll get carne audirvana, and all those things that you associate. But New Mexico is where the hatch chilies are grown. That's a passion unto itself. And that's why we call it Hatch Grill it was because we actually brought the chilies from hatched New Mexico out to Northern Virginia. When we were first setting up the restaurant, we had people who were from New Mexico that would poke their heads in the door and say, you know, like, are you really New Mexican food? Are you just calling it. So when we told him that we were bringing the chilies from hatch, and that we were authentic.

Rich Alterman  06:35

Yeah, let's get down to business actually shared as part of the advisory service, you'd produce a lot of data studies that focus on key trends in the market that can impact your clients. So let's spend some time discussing some of the observations you and your team have made based on the data that you've gleaned from examining consumer and business credit files. So looking at your profile, I understand that while I had experience upon the onset of COVID, in the Cares Act, that's really when you became responsible for producing weekly market insights and summary reports. So you know, when we think about COVID, and the Cares Act at the time, we had forbearance, we had deferments, concerns about the value of a credit file, what were some of the insights and recommendations that you were bringing to the table at the time during COVID, in the Cares Act as those were really hitting our economy hard

Tom O'Neill  07:22

And that that we're not in interesting times, still, but that was a period that I don't think had ever, we don't have an equivalence of that early 2020 through 2020, really, where the the immediate reaction to COVID. And even more than the pandemic itself was the effects of the pandemic. Yeah, the isolationist society, we everyone was indoors, spending fell off a cliff. And possibly even more importantly, no one knew what was coming next was this sort of the new normal. So understandably, from a lending perspective, the natural reaction was to withdraw, it was just to stop and stop it and see what happens before we make any other determination. And as you said, you we also rolled out the Cares Act and all of the reporting guidelines that came with that, with the intent of helping our consumer base helping all these households weather this storm that we didn't know what the severe, you know, ultimate severity was ration of it was going to be. And I would say, you know, for the most parts, from all the data that I've seen, it looked like a lot of what the Cares Act was put in place for did its job, we did sort of avoid that tsunami of delinquencies and charge offs that a lot of people were concerned about. But it did raise a lot of questions that you bring up with forbearance and payment holidays, and even the stimulus checks that went out is this creating an environment that really is artificial, it's not sustainable. And it's creating a this picture of consumers who are more credit worthy than what they really are underneath without all of these things popping up. And that was a legitimate concern. And we did see things like the average scores increasing over time. So we saw a 720 was now a 740. And it's, it's important to understand, it's not that the those scores were no longer working, they do work as well as they ever have in terms of distinguishing higher risk and lower risk consumers. The difference though, was the underlying activity that those scores were based off of that was changing. So when, when the Cares Act says someone who misses a payment can't be reported as delinquent, that changes things. score is still you know, conveying that properly, but that situation itself was rather artificial. So that that did lead to a concern that maybe a lot of this was just kicking the can down the road. And that when those deferments came off the books, when the checks stopped coming from the government, that we would be feeling the wrath of all this. And fortunately, that tsunami that I mentioned before, it seemed to have been avoided. We didn't have that big test rate, but it didn't raise a question in a lot of people's minds of can we just rely on the traditional scores. And one thing that I've consistently and we as a group have consistently gone back with is, those traditional risk scores are just as relevant today, as always, they still work, they should still be a fundamental part of credit decisioning. But we're now at a point, which really, you know, the trends towards this had started even before COVID, but COVID has exasperated, we're at a point where you shouldn't, and in many cases, you can't just rely on that you need to have alternative ways of getting a holistic picture of the consumer, whether that's through other scores overlaid with, with those traditional scores, or some of the things that we'll probably talk about alternative data, trend data and things like that.

Rich Alterman  11:23

Let's kind of go back to the deferments and whatnot. I was reading one of the reports that you were sent to me to take a look at. One of the things that kind of struck me was when it came to bank card originations in particular, and associated credit limits, that in the report on credit trends, it highlighted that September year to date of this year, there was a 15% increase in bank card originations 22 versus 21. But over the same time period, we saw credit limits increased by 36%, with the average credit limit on a bank card going to $5,100. So was some of that phenomena where people were getting a lift in their scores, potentially contributing to lenders pushing out higher credit limits? And if so, are they potentially going to pay the price for that, in the long run, especially now, with what we're seeing in the economy?

Tom O'Neill  12:19

It's a legit question. And there's actually a few things. I think that's underlying those trends that you mentioned. Some of them are a reaction to that shutdown in first quarter of 2020, when everyone just stopped and wanted to test the waters before getting back in. And one of the things that developed over the course of 2020 was when people were starting to feel a little more comfortable lenders were starting to feel a little bit more comfortable. They not only saw that the risk levels may not have been as much as they feared it would be but also the opportunities out there were drawn to as we were starting to come out and consumer spending was picking up and people were doing things, a lot of lenders wanted to be right in there and be able to take advantage of the opportunities, sort of that K shaped economy that so many people have talked about where yes, there are households that are truly impacted and are in a difficult situation. But there's a lot of households that have also actually come out quite well over the last couple of years, given the situation. And so that risk reward trade off is something that a lot of lenders have been wanting to jump on. So they want to be able to take advantage of those areas where there's growth opportunities. But at the same time, there's still a little bit of that, you know, we don't know exactly what's coming. So they do so in as conservative of fashion as they can. So the upshot of that is that a lot of the that line increase that you're saying is that it's going to the prime consumers, it's going to through credit line increases to customers that have a track record of responsible behavior, and the originations themselves tend to go to those higher score consumers, which also have the higher lines associated with them. In fact, if you superimpose the subprime portion of those originations, you'll see that that has trailed off negatively. And more and more of those, those lines that are originated are going to prime consumers. And to your point is some of that may be impacted by those rising scores. But even as we've seen delinquencies, tick up over the last couple quarters, they're moving up from next to zero. So on one end you can say oh, delinquency is that they've been rising. It's like, well, but they were basically zero through 21 here.

Rich Alterman  14:48

Yeah. And so consumers were stocking away a lot of cash and savings rates were up, right, but unfortunately, now we're seeing the opposite. So through the data that we have at GDS Link, you know, we have obviously a lot of hosted clients were able to get some visibility. So what we saw, Tom was in April of 2022 is a severe pullback in volume. And our hypothesis was at the buy box that lenders were setting with companies like Credit Karma, or Credit Sesame, where they were looking at leads, that they actually tighten up the buy box, right, so maybe having a higher vantage or FICO score as a cut off, and then probably mid to late 2021, we started seeing volume start going back up, but we definitely are now starting to see volumes starting to trail off a little bit. So do you think that as we get more into 2023, that we might see some of that same phenomena at the same type of levels? Or do you think we'll see it, but it won't be as pronounced?

Tom O'Neill  15:47

I think more the latter, then there's there's so much that can potentially affect that. I don't think we're going to see what we saw in the first part of 2020. Because like we said earlier that that was such a unique time where everyone almost overnight, just sort of withdrew and said, you know, a month ago, no one was talking about COVID. And now suddenly everyone's shut off inside and and we don't know what's happening. That's a unique situation. And yeah, it's that dramatic cliff that everyone fell off of everyone withdrew from now when we're looking for ahead, and we're looking at originations, it's more I hate to call it, you know, more the traditional downturn, but it's more similar to what we've seen in the past where, you know, we look at the economic downturns and the associated rise in delinquencies and drops in originations, I think we're looking at a little bit more along those lines than what we're seeing in early 2020. But I still think that this is even this, I say, a traditional downturn. But even this is kind of unique in that more than in other times, we're seeing these divergences of households that are doing okay, and doing well. And those that are struggling. And what's unique, from my perspective is that those different households, you know, look so similar on your portfolio right now. So we could have two consumers with a 720 risk score, but one owns their house, which has appreciated greatly in value over the last couple years, and they're on a fixed rate mortgage, maybe they work from home, and so they're not eating the price at the pump as gas prices rise. And then we've got the other who is renting, and has no choice but to absorb the costs of rising rent. Yes, over time, that will be reflected in those scores as one consumer thrives and the other one struggles. But right now, they look very similar. So it gets back to what we were talking about in terms of needing other ways of getting more holistic view into that consumer.

Rich Alterman  17:59

But I'm sure you saw the study that Lending Club published, right, that says like, what 65% of households now are living paycheck to paycheck, young people with six figure incomes, right. So it's not that they don't have the money sitting in a 401k. Right. It's just that their liquidity is an issue. They're seeing class rise, and they're starting to get squeezed.

Tom O'Neill  18:19

If I remember that correctly, you know, that was that 65 66% was compared to what was it 30%? Just a year ago, right? So it's, I mean, that's what we're talking about, right that you were saying a third of the households out there have gone from doing okay to now living paycheck to paycheck or not, not even able to live paycheck to paycheck over the course of one year.

Rich Alterman  18:47

And what concerns me is I think, as we look at a lot of the layoffs we're reading about, I think this is gonna be more of a white collar layoff event. You'll look at the announcement by Marcus, you look at the announcement by Amazon, I think these are gonna be more corporate type jobs that take the hit. So you mentioned we donation, alternative data guys acquired CoreLogic, Teletrack, 2021. I used to work there. you acquired DataX in 2019. You have Utility Data in your your database now. And so you have an offering called one score, which kind of combines all this information when you're doing advisory. I think there's a perception, right? Well, if I deal with subprime, I mean, if I deal with prime consumers, is this data really going to help me?

Tom O'Neill  19:31

I don't need alternative data all my guys are right, right.

Rich Alterman  19:35

Right. Yeah. You know, I can remember at Teletrack doing the data study with a large card provider. And you know, they were shocked right to see that some of their consumers were using payday loans, so, when you're when you're sitting down and do an advisory. kind of walk us through some typical conversations that you might have with your clients about alternative data. That's one question I have and the other thing I was thinking about is on the utility data. And I think you might get that through your partnership that Urjanet, if I recall correctly, I think about my personal behavior is that, you know, I use a credit card to pay for my utility bills, because I want to get the points. So, you know, any thoughts or insights you might share are there as well, there are about that use of a credit card, paying utilities, and therefore, is the information I can add on the utility side, somehow clouded by the fact that I'm using my credit card just to incorporate, you know, discussions around open banking, you guys bought a count score. And certainly, we're seeing a big use of banking data today. So maybe incorporating all that into a

Tom O'Neill  20:41

well, let's unpack the general topic of all its data is such a rich one. And and as I mentioned before, it's it's one that had already started taking more and more relevance even before pandemic and downturn and all the odd odd times that we've been in, but the environment over the last couple of years, and what we're still in and going forward, just exasperates that trend even more. And it all comes down to the ability to get that more holistic view of a consumers financial and credit, portrait in historically, that was pretty much tied up with just the score. And again, taking nothing away from those I still, when I'm talking with clients, I still say that that is those are key components of any risk strategy. But now you want to overlay it with this alternative data. And a lot of people have the questions and reactions that you said, it's like, well, my portfolio is prime, these are not people going out to payday loans. But there's two things on one is you'd be surprised. Every time we've done a hit rate analysis on these, it's more than clients think that it would be and two, it's also around the definition of alternative data. It's not just payday loans, it's so many other sources that ultimately is credited behavior, these are credit transactions, and these are people borrowing money and paying back that debt that does not get reported to the traditional CRA s. So these aren't reflected in your score. But they are true measures of someone's financial activity. And so that's that's why it's become more and more important to to use a one score or yes, some other form of incorporating these views into that picture. And you mentioned some of the utility data in a vacuum, if I'm talking to a client that has all of the analytic resources and data consumption capabilities at their disposal they could possibly want, I would say, bring in all of the data. Yeah, just bring it in, analyze what's relevant to you, and use that. That's almost never the case, though, you know, no one has, you know, unlimited resources, no one can just bring in all of the data. And so that's where these scores become so valuable, because that, you know, one score, for instance, takes data x Teletrac utility data, as well as core credited data and says, Here's a score that based on that, insight scores, you know, another one where where we take that alternative data and and create something industry specific, so card or auto, or things like that, and it creates this much more digestible version of that alternative data. But ultimately, it's all serving the same purpose. It's saying, let's start with that traditional view. The scores that's based upon my credit card activity, my mortgage and all of that stuff. And let's layer in these views that are based upon the non traditional views. And that's where, in that situation that I described earlier, where we've got two 720s, sitting side by side within your portfolio, that's where you're going to start seeing the distinction between those. That's where you're going to start seeing Okay, well, Tom is a 720. But from a financial durability standpoint, from a, you know, overall risk, he may not be able to weather, the current storms, as well as Rich who's also a 720, but is in a different situation, economically.

Rich Alterman  24:24

Yeah. So when thinking about that, let's talk a little bit about trended data. Right. So I think the adoption of trended data has been a lot, or has been growing over time, currently. And it really first started. And I think at that time, the focus was more on the value add in helping identify transactors versus revolvers on a credit card. Right, right. Right. But, you know, when you're advising your clients today, who aren't using trended data, and you talk about those two guys with a 720, but understanding how they got there and where they're going, any insights on actual projects, maybe that worked on without obviously naming the customer. But you know, the lift that they got from incorporating trending data, let's say into a model versus not using trendy data.

Tom O'Neill  25:09

Yeah, it's interesting because the the justification for trended data has actually changed pretty dramatically in some of the conversations that I've been in from between now and two, three years ago, used to be that we could easily show the benefit of trend to data, you take those two 720s that we're using here, and simply use a very simple trend to date and say, hey, look, Tom's a 720. But six months ago, he was a 750. So he's trending downwards, which was, is a 720. But six months ago, he was he was a 690. So he's getting his financial situation in order, whereas Tom starting to struggle a bit, that was rather easy. And a lot of the same justification is still there today, but it's tempered a little bit, because what have we been looking at over the last six months, year, two years, three years, it's very unusual situation. So So when we're talking about trended data, now, we have to keep that in mind of is that trend to data, which is still very relevant, and gives a picture of where a consumer has been compared to where he is now. But is where he was truly reflective of his his ability to pay and financial strength. And so that's where we need to sort of, not just go in and crunch numbers and say, you know, whatever jumps out of the calculators, what we go with, what we actually put that human pair of eyes to it and make some subjective decisions of, okay, the data is telling us this, but let's temper that a little bit with what we know was going on six months ago, a year ago, and so forth.

Rich Alterman  26:45

A couple things I want to try to get to, before we wrap up, the one thing you cannot escape today is discussions about Buy now pay later. I mean, I understand there's a tattoo parlor down the street that now as a BNPL tattoo that they're putting on people. So the CFPB just released a major report on Buy now pay later. So it's certainly something that they're starting to focus on yourselves and TransUnion and Experian, have announced that they're going to start capturing, buy now pay later data, and you're doing it slightly differently each one of you. But when you look at a true buy, now pay later product, which is, you know, for equal installments, average loan of 200, to maybe $1,000. And we look at some of the stock prices going on with Varna and Affirm what are some of your analytics or studies showing you as far as is it really a good representation? Or do you think it will be a good representation of credit risk? Now, as we evaluate, buy now pay later data? And also, you know, where is Equifax in its venture to get these companies to really start reporting into your platform?

Tom O'Neill  27:52

Right, well, I'll start with the latter part of that first. And that said, as you mentioned, all three of the major bureaus are moving forward with capturing that information, I'll be it in slightly different ways for each one. And a lot of us not just within the bureaus, but also just the industry. On a whole, we are looking at the CFPB to see what are they going to be doing? You mentioned the report that they just came out with a few months ago, where essentially they said, We're going to be monitoring this, it is on our radar, we are looking to see what makes sense in terms of how this industry is regulated and reported. And for good reason. I mean, this, as BNPL has grown. Yeah, that's a lot of activity, a lot of credit activity that is sort of invisible to lenders, that it's not so much of a concern of how much more risk does this create, although there is an element of that, but it's more of a the fact that it's an unknown. It's like, we did a study, or we participated in a study where we said, you know, if BNPL activity was reported, what would the impact be? And we saw that, you know, based upon the performance of a lot of the information that was shared with us, a lot of consumers would benefit from having this information reported in a more traditional manner. Of course, it all comes down to whether or not you're actually making those four payments, as you should be in on time and stuff like that. But, but that's, that's what we found. So while there's maybe a bit of a push to say, well, let's report this and let's get this incorporated and update their scores to reflect this new information accordingly. I think everyone's taking a step of saying, well, let's study it first. Let's see what the impact is. And I think the CFPB is as well, you know, taking a look at that and saying, before we rush into new regulation and new new guidelines, let's see. And so I think the step that the Bureau's are taking with starting with capturing this information, making it available to get this information. That's sort of the first step from my perspective of what the long term approach is going to be

Rich Alterman  30:13

Last topic to kind of talk about given our time, you mentioned, evaluating all this different data, treasure show file and, and Teletracking, Data, X and others. And recently, as you're probably aware, you know, GDS has partnered with you guys with your Ignite, which is your analytics platform. And through that platform, we can help build models for custom models for our clients, where we can more easily evaluate the impact that this data can have on their scores and whatnot, any plug you want to put in for the Ignite platform, before we kind of start wrapping things up.

Tom O'Neill  30:46

I love Ignite and yeah, to me, it's it's the ultimate sandbox. Yeah, although product and marketing a meet calling it sandbox, but But essentially, that's, it's this environment where you can do exactly that you were we can make this data available as our clients are evaluating what the impact of bringing in different data to their processes into their decisioning is. That's where they can do it. And the tools are there to do the analysis, the data is there, their own, the clients data can be uploaded. So you're looking at your actual consumer base. And it just makes that whole process of evaluation so much easier. And then taking that and then deploying it into your process, saying like, Okay, we've we brought in data x, for instance. And we've realized that we can benefit from using certain elements of that in these different situations, we can run that analysis, we can build models, calibrate models, and deploy those as needed. So to me, it removes one of the the major obstacles that our clients have historically had, in terms of being able to see and recognize the benefits of all these different data assets.

Rich Alterman  32:04

Yeah, and it lets it do so much more quickly. And, you know, everyone's about time to fund and making changes to their systems. So that's great. I appreciate that. So, last question of the day before we wrap up, you were sitting down today with a rising college senior, what career advice would you give them?

Tom O'Neill  32:24

Wow. Ironically, I have two college seniors. So this is a very pertinent question. And part of that is going to be a very hokey dad like answer. That is to focus on what you enjoy doing. And I know that is so cliche, and that is so like, roll your eyes dad type of answer, but but the older I get, and the more that I do, the more I realize that there is so much truth in that. And the other part of that, which is actually kind of related is that, and this goes for the my freshman going into college right now is, yes, it's important to get your degree and learn your trade and learn your subjects that you are interested in and going. But it's probably even more important to learn to think and to reason through and because what you're learning in college today is going to be obsolete in three years. And so, so if you are able to learn to train your mind to adapt and stay interested in things, that's going to serve you much longer than what you're actually studying right now.

Rich Alterman  33:38

Yeah, I agree with you. When I started my first job in 1982 was Citicorp retail services. For the first three months, I was living at my parents before I moved out to Long Island. And on Wednesday nights, I would say at dinner, you know, it's hump day. And my father would say, what's his hump day thing again? Well, you know, it's only two days to Friday, right to the weekend. And my dad would look at me and say, Rich, you're gonna be working for another 45 years. If you spend your entire work week, looking forward to the weekend, and you're never looking forward to Monday. You need to get yourself a new job.

Tom O'Neill  34:11

Wow. Right. Dads can be pretty wise sometimes. Right.

Rich Alterman  34:16

Well, Tom, thanks for joining us today. And I'd love to have you back. As I said, I think we touched on about 20% of the topics. We've got a part two just waiting in line one, part two. Yeah. Well, anyway, this is Rich Alterman and we have been syncing up with Tom O'Neill, risk advisor at Equifax. We hope you've enjoyed the podcast today and will stay connected with GDS's the lending link to listen to future podcast and catch up on one set you may missed? Tom Have a great day. Have a great weekend.