Academic journal article ABA Banking Journal

Look What Credit Scoring Can Do Now; Loan Analysis, Behavior Prediction, Fair Lending Enhancement, and More. Banks Start to Apply It to Mortgages and Small Business Loans

Academic journal article ABA Banking Journal

Look What Credit Scoring Can Do Now; Loan Analysis, Behavior Prediction, Fair Lending Enhancement, and More. Banks Start to Apply It to Mortgages and Small Business Loans

Article excerpt

Loan analysis, behavior prediction, fair lending enhancement, and more. Banks start to apply it to mortgages and small business loans. By Joe Asher

A generation ago, a would-be consumer borrower typically sat across a desk from a loan officer, filled out an application, and fidgeted while the loan officer fumbled with a paper checklist, slowly comparing it with what was on the application. That was credit scoring then.

Look at credit scoring today. Likely as not, computer-generated models and scorecards match the applicant's credit information with information in a database to arrive at scores and a swift yes/no decision. Often the applicant never needs to set eyes on the loan officer at all. The results are speedy turnaround, improved objectivity in lending decisions, and improved productivity on the part of loan officers.

Welcome to the world of credit scoring, where changes have been coming fast recently. The systems have advanced light years in sophistication, they've been extended to many more areas of banking, and they've spawned a host of kindred systems that amount to a family of credit-related scoring activities. Not least, they are tools to help bankers in the politically charged area of reaching out to population segments that were previously neglected, not easy to serve, or both.

Fewer naysayers

Where once credit scoring was confined to small personal loans, today it's extensively used throughout the banking industry across the spectrum of consumer credit--personal loans and personal lines of credit, direct and indirect auto loans, credit cards, home equity loans, and to a small but growing extent, home mortgages.

"The process is more sophisticated and fine-tuned," says Larry Miceli, vice-president, risk assessment at PNC Bank, Wilmington, Del. "No one drives it totally on auto-pilot, but the nay-sayers have diminished over the last decade."

Here are a few examples of what banks are doing with credit scoring:

* "We're using credit scoring in all areas of consumer credit," says James Petersohn, vice-president, credit approval systems management in the consumer loan division of Bank of America.

* "We use credit scoring for consumer loans, auto loans, home equity loans, and unsecured credit. Our experience is positive and we'll continue to refine and enhance what we have," says Carey Theilman, vice-president, U.S. Bancorp., Portland, Ore. (U.S. Bancorp's mortgage subsidiary is also pilot testing use on mortgages.)

* "It has many more applications today, and is also used for reviewing bigger size loans and deciding at what point a loan needs a higher level signoff," says Gloria A. Beissinger, vice-president, Chemical Bank, New York.

Commercial scoring?

With this much experience on the consumer side, it was only a matter of time before credit scoring would migrate to the commercial side of banking. A growing number of banks report use of scoring models in small-business lending decisions. (Chemical is now conducting a pilot.) Until fairly recently, Crowe Chizek and CCN (formerly MDS) were almost alone in offering software for this use. But other vendors in the small-business area have come on the scene because industry interest picked up very sharply in recent years.

"This use is still not widespread, but a great many banks are looking," says J. Scott Wilfong, senior vice-president, First National Bank of Maryland, Baltimore, and chairman of the ABA's Small Business Banking Unit.

"A few years ago, the response to our small-business products was somewhat cool," said Latimer Asch, business unit manager for commercial products at Fair, Isaac and Co., a pioneer and frequent trend-setter among scoring-specialist firms. "Today it's at fever pitch."

A point frequently made is that small businesses are closely intertwined with the principals who run them. When the business itself has little or no credit history to evaluate, the personal credit history of the proprietor can be used in scoring models to "leverage" the credit characteristics of the business. …

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