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#21986 - 06/26/02 04:22 PM Credit Scoring - FICO Driven Underwriting
SJB Offline
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California
Our consumer lending department wants to adopt use of FICO scores rather than the full blown underwriting process currently being used. My concern is possible fair lending exam problems.

If we adopt such a program and come up with cutoff scores for the various products, etc., do we have to do anything on a regular basis to show that the score is "empirically derived and demonstrably and statistically sound?" How about "periodic revalidation?"

I also know that monitoring overrides and exceptions will be a big concern.

Thanks!
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#21987 - 06/26/02 05:30 PM Re: Credit Scoring - FICO Driven Underwriting
Princess Romeo Offline

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Talk with someone at Fair Isaacs about converting from "traditiojnal" underwriting to credit scoring. Essentially, you should conduct at least 300 side-by-side processing of applications where you do a manual underwriting and then also review the credit score. Track the scores on those applications that are approved or declined based on your traditional method to build a base line of where the scores are falling within your "approved" applications vs "declined" applications in order to set your initial cut-off values.

As for validation, you need to track performance of those loans approved: Performing as agreed, Delinquency, charge-offs, etc. If you notice that all of your loans are performing as agreed, then you can probably lower your cut-off to include more approved applications.

If you have a delinquency rate that is not acceptable to your institution, then you need to increase your cut-off value.

Document the score-to-performance history, and that would be your validation.

Also, keep a tight rein on over-rides, especially the so-called "high-side" overrides, i.e. loans that scored above your cut-off that were declined anyway. Also, in your loan policy, make sure you have a provision for an over-ride policy with sound business reasons for approving an over-ride. Keep a log of the over-rides and make sure Loan Committee or Sr. Management is reviewing this.
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#21988 - 06/26/02 10:35 PM Re: Credit Scoring - FICO Driven Underwriting
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EDDaSS only matters if you want to score the applicant's age.
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#21989 - 06/27/02 08:49 PM Re: Credit Scoring - FICO Driven Underwriting
SJB Offline
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California
Thanks Bonnie and Richard.

Anyone happen to have a handy credit scoring policy (using FICO rather than an in-house system) they could share? I hate re-inventing wheels that already roll.

Steve
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#21990 - 06/28/02 02:34 PM Re: Credit Scoring - FICO Driven Underwriting
rlcarey Offline
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I'm just curious - if you use the FICO score and the applicant does not reach the cut-off and therefor is denied credit - what reason do you provide the applicant?? Do you know all the components that make up the FICO score does the credit bureau tell you the top three reasons for the low score? You can't just tell them that they scored too low.
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#21991 - 06/28/02 03:43 PM Re: Credit Scoring - FICO Driven Underwriting
Michelle D Offline
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There are couple things you can do, the first is to use the model adverse action for credit scoring that you can use, it's C-3. What you do then is to look at the codes that the credit bureau provides that contributed to the score and you use those reasons.

The second is to use a traditional adverse action and try to translate the credit score reasons into standard adverse action reasons, that's a lot tougher.
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#21992 - 06/28/02 05:23 PM Re: Credit Scoring - FICO Driven Underwriting
Miss Kitty Offline
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California
Bonnie,
This is something new to us that we are just introducing - do you have any Policies/Procedures you would mind sharing? Or does anyone else?? Thank you.

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#21993 - 06/28/02 05:26 PM Re: Credit Scoring - FICO Driven Underwriting
Princess Romeo Offline

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In reply to:

The second is to use a traditional adverse action and try to translate the credit score reasons into standard adverse action reasons, that's a lot tougher.



I would NOT use this approach if I were relying only on a score to determine credit approval. From the "Been-There-Done-That" school of hard knocks, it was a DISASTER on the Reg B portion of an exam! If you use the score, then you must use the SCORE reasons for an insufficient score. To try and devine a "judgemental" reason puts you square in the headlights of Reg B 202.9(b)(2) and related Commentary.

Actually, read what the Commentary has to say about denial reasons when using a credit scoring system, or even a combined credit scoring system and judgemental system. It's pretty specific that the reasons for denial must come from the component of the system that the applicant failed.
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#21994 - 06/28/02 10:52 PM Re: Credit Scoring - FICO Driven Underwriting
SJB Offline
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California
This is a great discussion. I told the lending side this would not be as easy as just pick a cutoff number and off we go!

Anyone willing/able to share that policy? [Please???]
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#21995 - 08/14/02 04:47 PM Re: Credit Scoring - FICO Driven Underwriting
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Bonnie -

I have looked at the Reg B Commentary and Model Form C-3 and have a followup question.

We will be using the FICO score which is derived from a system we (obviously) did not develop and do not control. Model form C-3 contains the following language:
"Your application was processed by a credit scoring system that assigns a numerical value to the various items of information we consider in evaluating an application. These numerical values are based upon the results of analyses of repayment histories of large numbers of customers."

Should we change the model language to reflect that the numerical values were not assigned by us but instead by Fair Isaac & Company or something generic like "the developer of the credit scoring system" so it is clear it is not our scoring system upon which the decision was based?

For denial reasons we would list the reasons that are included with the report.

Thanks for your input.

Steve

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#21996 - 08/14/02 10:26 PM Re: Credit Scoring - FICO Driven Underwriting
Princess Romeo Offline

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Steve,
Before modifying the model language to something that specific, I recommend that you check with your regulator and with qualified legal counsel. It's always a bit dangerous to start changing model language.

The statement "These numerical values are based upon the results of analyses of repayment histories of large numbers of customers." is, in and of itself, a true statement without the need to further explain it.

The statement "Your application was processed by a credit scoring system that assigns a numerical value to the various items of information we consider in evaluating an application." perhaps could be modified to replace the "we" with something more generic, or you could leave it at that since, in adopting the use of the credit score system, the score is based on information you consider.

You may also try asking Fair Isaac if they have any wording, and then run that by your regulator to see if they agree.
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#21997 - 08/15/02 02:25 PM Re: Credit Scoring - FICO Driven Underwriting
Sinatra Fan Offline
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I'm curious. How do you--with a straight face--tell an applicant that he or she has been denied credit, based on a score calculated by a company he or she never heard of, using a calculation matrix that the company will not disclose to lenders, for factors that the lender can't fully explain to the applicant? Just wondering.
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#21998 - 08/15/02 06:37 PM Re: Credit Scoring - FICO Driven Underwriting
SJB Offline
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California
Here is the way the lending folks are describing their plan: Applicants who exceed a cutoff FICO score will be processed as stated income applications with minimum documentation. There will then be a range below that cutoff where full documentation will be required but the application will probably be approved. Applicants scoring below the lower limit of the full doc range are doubtful from the start but not an automatic decline. Traditional underwriting will be used on the low score applicants and compensating factors will be necessary.

Based on the above scenario an application may be pretty well approved due to a high FICO score but it does not appear an applicant would be declined just because of a low FICO score, even though the underlying problems that led to the score will probably also lead to the decline. With that said, I need to rethink whether model form C-3 would even be the appropriate adverse action notice to use.
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