Some loan officers used to go by rules of thumb. There were “The Three B’s: never lend to beauticians, bartenders or barbers” and “The Three P’s: never lend to preachers, plumbers or prostitutes.” Now we have an automated system, but it can’t tell an upstanding banker from a down-on-his-luck bartender.
Imagine a high-level banker who leaves his job for a promotion in another state. He’s trusted and respected for the job he did as senior risk manager, reporting to the board of directors, at a 19-branch bank in Atlanta. But for moving and taking that new job, his credit score declines. He’s forced to pay more for his new mortgage.
“That makes no sense,” he says, “It’s completely out of context,” says Clark Abrahams, SAS’s chief financial architect. He’s happily resettled, but he’s out to overhaul the U.S. credit scoring system.
The context the system missed is his ample capacity to repay the loan. He’s automatically put in the same basket as some other applicant who may live paycheck-to-paycheck.
Context is just what he would inject into the U.S. credit-scoring system. He calls the new system he’s promoting model CCAF (SEE-caff), for Comprehensive Credit Assessment Framework.
Today’s distorted scoring began decades ago, he explains. Before we had credit scoring, we had loan officers. They approved or denied loans based on their own experience and judgment. But that was unreliable and often unfair.
So when computers became available, banks developed scoring. Now we’ve swung the other way: proxy metrics, not common sense, rate credit applicants.
It’s a story in progress for TDWI’s BI This Week.