Discover 2015 Annual Report Download - page 21

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Credit Risk Management
Credit risk management is a critical component of our management and growth strategy. Credit risk refers to the
risk of loss arising from borrower default when borrowers are unable or unwilling to meet their financial obligations to
us. Our credit risk arising from consumer lending products is generally highly diversified across millions of accounts
without significant individual exposures. We manage credit risk primarily based on customer segments and product
types. See "— Risk Management" for more information regarding how we define and manage our credit and other
risks.
Account Acquisition (New Customers)
We acquire new credit card customers through direct mail, internet, media advertising, merchant or partner
relationships, or through unsolicited individual applications. We also acquire new student loan and personal loan
customers through similar channels. In all cases we have a rigorous process for screening applicants.
To identify credit-worthy prospective customers, our credit risk management and marketing teams use proprietary
analytical tools to match our product offerings with customer’s needs. We consider the prospective customer's financial
stability, as well as ability and willingness to pay.
We assess the creditworthiness of each consumer loan applicant through evaluating applicant’s credit
information provided by credit bureaus and information from other sources. The assessment is performed using our
credit scoring systems, both externally developed and proprietary. For our unsecured lending products, we also use
experienced credit underwriters to supplement our automated decision-making processes. For our home equity
products, experienced credit underwriters must review and approve each application.
Upon approval of a customer's application for one of our unsecured lending and home equity products, we
assign a specific annual percentage rate using an analytically driven pricing framework that simultaneously provides
competitive pricing for customers and seeks to maximize revenue on a risk-adjusted basis. For our credit card loans, we
also assign a credit line based on risk level and expected return.
Portfolio Management (Existing Customers)
The revolving nature of our credit card loans requires that we regularly assess the credit risk exposure of such
accounts. This assessment uses the individual's Discover account performance information as well as information from
credit bureaus. We utilize statistical evaluation models to support the measurement and management of credit risk. At
the individual customer level, we use custom risk models together with generic industry models as an integral part of the
credit decision-making process. Depending on the duration of the customer's account, risk profile and other
performance metrics, the account may be subject to a range of account management treatments, including transaction
authorization limits and increases or decreases on credit limits. Our installment loans are billed according to an
amortization schedule that is calculated at the time of the disbursement of the loan and at the time the loan enters
repayment.
Customer Assistance
We provide our customers with a variety of tools to proactively manage their accounts, including electronic
payment reminders and a website dedicated to customer education, as further discussed under the heading "—
Customer Service." These tools are designed to limit a customer's risk of becoming delinquent. When a customer's
account becomes delinquent or is at risk of becoming delinquent, we employ a variety of strategies to assist customers
in becoming current on their accounts.
All monthly billing statements of accounts with past due amounts include a request for payment of such amounts.
Customer assistance personnel generally initiate contact with customers within 30 days after any portion of their
balance becomes past due. The nature and the timing of the initial contact, typically a personal call or letter, are
determined by a review of the customer's prior account activity and payment habits.
We reevaluate our collection efforts, and consider the implementation of other techniques, as a customer
becomes increasingly delinquent. We limit our exposure to delinquencies through controls within our process for
authorizing transactions and credit limits and criteria-based account suspension and revocation. In situations involving
customers with financial difficulties, we may enter into arrangements to extend or otherwise change payment schedules,
lower interest rates and/or waive fees to aid customers in becoming current on their obligations to us. For more