Friday, October 27, 2017

How Do Lenders Test The Performance of Credit Scoring Models?

Published by VantageScore Oct 2017:

Credit scores have been a ubiquitous and valuable component of the underwriting process for decades. Credit bureau risk scoring models have been available since the late 1980s and have been used for almost three decades by credit card issuers and auto lenders. Further, it’s been almost 20 years since both Fannie Mae and Freddie Mac endorsed the use of credit scores in their respective automated underwriting systems, known as Desktop Underwriter and Loan Prospector.

The measure of a good credit score model is its ability to rank order. This means that the model effectively identifies those who will remain current on their payments versus those who will not.
So-called “generic credit scoring models” are built using millions of credit files to represent the enormous number of patterns of credit management and payment behaviors for a set of products during a specific time frame and economic condition. As long as those patterns and economic conditions remain fairly stable, the model will continue to rank order as well as when it was first developed.
However, when economic conditions change dramatically (i.e., as they did during the recession), models deteriorate and fail to rank order as well.
For a lender, failing to rank order means consumers who will ultimately default (i.e., fall 90 days or more past due) receive high enough scores to result in credit and loan approvals. In the end, lenders experience higher losses, causing their businesses to be less profitable.
A core responsibility for credit score model developers and users is to validate their models in order to assess whether the models are still performing strongly
For the developer, these validation procedures should assess whether the scoring model effectively rank orders populations and key subpopulations, whether the model has implicit bias that could cause a disparate impact, and whether scores reflect the appropriate level of risk.
A substantial deterioration in the performance of any of these tests, the availability of newly developed data or modeling techniques that could materially improve a model’s predictive performance or ability to score more people should cause the developer to consider developing a new model. To aid lenders and regulators, VantageScore Solutions transparently posts the results of its validations publicly on our website.
Similarly, model users – such as credit and risk functions within lending institutions – should periodically consider their own validation processes. These processes, as outlined in the Office of the Comptroller of the Currency’s (OCC’s) 2011-12 guidelines, should be implemented to determine how effectively the scoring model they are using identifies and measures the risk of their lending strategy on their particular customer base.
Typically, when lenders validate their incumbent scoring model, they also evaluate a number of “challenger” scoring models to determine whether more effective risk management tools are available than the one being used. In the event that a challenger model is more predictive or scores a larger population of consumers with equivalent accuracy, the lender will begin a process of replacing the incumbent model with the new model.
This can be an involved process, requiring redevelopment of strategies with new score cutoffs, rebuilding internal models and decision processes, coordinating and aligning reason codes, as well as initiating thorough audit and compliance reviews. Ultimately, the cost of converting to the new model must be offset by the opportunity to enhance profitability through loss reduction and customer revenue.
Quite interestingly, there is a substantial yet generally invisible benefit of these ongoing validation exercises. Today, as a lesson learned through the recession, credit scores are now often tested on an almost continual basis to determine their effectiveness. As soon as a score fails to deliver sufficient value, it is replaced by newer models that leverage more advanced credit data and sophisticated modeling techniques, which are more representative of the current credit environment.
As such, the industry standard for superior predictive performance continues to improve as the competition for better predictive performance and a larger, scoreable population intensifies with the introduction of each new model.
The latest validation results for the VantageScore credit score models can be found at:

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Saturday, October 7, 2017

It Now Appears That Equifax Was Punishing Chapter 13 Bankruptcy Filers

While its competitors, TransUnion and Experian, placed a flag on such histories for seven years, Equifax left it on the reports of Chapter 13 filers who failed to complete their bankruptcy plans for 10.
After ProPublica asked about the difference in its policy, the company said it now leaves the flag on for seven years, but refused to say when and why the change was made.
The consequences of Equifax’s harsher policy were likely life-changing for some unlucky people. As Experian warns consumers on it's website: “having a bankruptcy in your credit history will seriously affect your ability to obtain credit for as long as it remains on your report. It can also affect your ability to qualify for things like an apartment, utilities, and even employment. Even car insurance rates may be affected.” Without knowing why, consumers could have been turned down for apartments because landlords checked their Equifax report rather than those from Experian or TransUnion.
Why Equifax’s policy was different is unclear and the company would not address it. But that such a discrepancy had gone unnoticed and unaddressed for so long underscores how lightly regulated the industry is.
ProPublica contacted all of the major credit agencies earlier this year as part of our ongoing series on consumer bankruptcy. The policies of TransUnion and Experian were similar: People who filed under Chapter 7, which wipes out most debts, would have a flag on their report for 10 years; those who filed under Chapter 13, which usually involves five years of payments before debts are forgiven, would have a flag for seven.
Equifax had the same Chapter 7 policy. But the company had a key difference in its policy for Chapter 13 filers: Those who were unable to complete their five years of payments and had their cases dismissed were saddled with a flag for three additional years.
This difference had the potential for widespread impact. About half of Chapter 13 cases are dismissed, usually because debtors fall behind on payments. From 2008 through 2010, 574,000 Chapter 13 cases were filed and subsequently dismissed, according to our analysis of filings. Under Equifax’s policy of keeping the flag on for 10 years, all those debtors would have a flag on their Equifax report through the end of 2017, but not on their TransUnion and Experian histories.
“It’s a problem, because you have a disparate treatment of debtors depending on which credit rating agency is reporting,” said Tara Twomey, an attorney with the National Consumer Law Center. “We really need consistent credit reporting for this system to work.”
ProPublica wrote the company again in July, prior to its recent disclosure that its records had been hacked, laying out the potential impact of its policy on consumers and asking why it differed from competitors. In an email, Equifax spokeswoman Nancy Bistritz-Balkan wrote that the company had “recently modified the length of time for how long a dismissed Chapter 13 bankruptcy remains on file.” Under the new policy, she wrote, “Equifax removes the flag for a Chapter 13 bankruptcy after seven years, regardless of outcome.”
She would not say what “recently” meant, only saying, “The change we referenced was not implemented after we received your inquiry.” As to why Equifax made the change, she wrote, “At this time, I do not have additional details about how the change was made.”
Story brought by ProPublica.

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