Recent developments in the application of credit-scoring techniques to the evaluation of commercial loans

Since the early 1990s, credit scoring has become the dominant method for assessing grants of many kinds of consumer loan. In particular, car loans, credit cards, direct and indirect loans, and other forms of consumer loan are commonly scored and decisions made without the intervention or involvement of individual loan officers. Procedures and practices have been changing rapidly in the granting of consumer loans. Initially, most loans were granted as the result of applications specifically submitted by applicants. More recently practices have changed. Rusnak reported that recent innovations by credit-reporting companies, such as the standardization of the reports and the development and sale of generic credit scores by the three major producers of credit information (TransUnion, TRW, and Equifax) have resulted in lenders preapproving credit for individuals who have not even presented applications. In the case of some credit-card companies, a majority of their accounts are now originated via preapproved solicitations. In terms of scoring models, commercial vendors – such as Fair Isaac and CCN–MDS – have dominated model development. Relatively few institutions have developed in-house models, because they lack the necessary technical expertise (both econometric and legal) and also cannot supply the computer systems and support activities that are necessary to operate models on a large scale. There are many motivations for the movement to consumer credit-scoring systems. These include the need to control expenses, the desire to gain greater uniformity in the lending process, increased responsiveness to customers' needs, enhanced productivity, and – perhaps most importantly – the need to provide protection against potential violation of antidiscrimination statutes in the granting of loans to minorities and other protected classes of consumers, such as the elderly.