Validating a Credit Scoring System

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Question:

We have started using credit scoring for small business and some consumer loans. Reg B requires that we "validate" the scoring system (which is the credit reporting agency's FICO system). My question is "how do we validate this system".

Answer:

The Reg only requires validation if you want your system to qualify as an " empirically derived, demonstrably and statistically sound, credit scoring system." Meeting this standard has a single benefityou can assign a score value to the applicant's age. If your system doesn't assign a value to age, then Reg B imposes no obligation for validation. It does, however, point out the need to monitor system decisions to assure that no disparate treatment occurs.

First published on BankersOnline.com 5/07/01