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• W273588057 abstract "The speed with which use of scoring systems are spreading is breathtaking. Long limited to consumer lending, and especially credit cards, scoring systems have expanded in just the past year to both mortgage and small-business credit. For mortgages, the primary catalyst was the decision last year by the Federal Home Loan Mortgage Corp. and then the Federal National Mortgage Association, to require use of scoring on most purchased loans -- and to require repurchase of some with failing grades. For small business lending, once thought to be too varied and complex for scoring, the breakthrough event was the late 1994 release of a specialized Fair, Isaacs scoring system. That is a lot of change in a year. Changing role of scoring Moreover, expansion to mortgages and small business is only one of the ways in which credit scoring has grown in importance. The other is that lenders have begun applying the techniques of credit scoring to new aspects of the. credit process. Scoring was once confined to the front-end risk evaluation -- deciding whether to approve a card or market a loan. Today it is being used for: * Risk-based pricing. * Revaluation of outstanding credits. * Differential handling of late payments. * Outcome predictions for delinquencies and differential handing of collections. * Targeting of customers. The last point is especially potent from the compliance standpoint because it hits two trip wires of concern about consumer protection: privacy and fair lending. Lenders are on the verge of combining scoring technologies with huge databases on customers and prospects. The combination will enable them to evaluate complex profiles showing consumers' current financial position, past financial record, and demographic characteristics. Eventually, it seems inevitable (unless prevented by law) that these profiles will add information on buying habits, as reflected in both purchased databases and in the information that flows through banks' hands as they process credit and check information. Mix the power of this information with the power of ever-more-sophisticated scoring tools, and the result is a potent new way of seeing customers. Big mass-market lenders like card companies hope to be able to slice and dice the marketing data into the fabled segment of one, creating the ability to tailor the product, the price, and the marketing vehicle perfectly to match the individual interests, creditworthiness, and attractiveness of the prospective borrower. Will these and other changes be good or bad for consumers ? The answer to that depends on whom you ask. Scoring's plusses On the plus side, there are powerful (though rarely articulated) arguments that these developments are very good for customers, and will get even better: * Lower costs. Scoring systems are more efficient than human loan evaluation. They raise the potential for true, massive reduction in the cost of delivering credit which, if market forces work properly, could make credit more affordable and more widely accessible. Furthermore, lowering costs for the majority of borrowers can free up resources to enable lenders to give better attention to those who may need it, including lower-income customers. * More accuracy. As scoring systems get better at predicting actual loan performance, creditors will get better at making loans accurately to all who will repay, and denying them to all who will not. That would be good not only for creditors, but also for borrowers, who are not well served by getting credit they cannot handle -- a point sometimes overlooked in the credit access debate. There is still plenty of controversy over just how accurate scoring systems are as predictors, but a lot of evidence exists suggesting they are often as good as, or better than, human underwriters. * More consistency/less bias. Scoring advocates argue one of the great virtues of having computers assess risk is fairness, and with it, fair-lending compliance. …" @default.
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• W273588057 title "Credit Scoring at a Crossroads: Privacy, Access, and Fairness Concerns Can Be Successfully Addressed" @default.
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