Development of Lending Guidelines

Most lending organizations have in place guidelines or policies that attempt to limit risk and exposure to adverse selection of applicants. In the case of generic credit scores the guidelines usually include risk ranges, loan term and interest rate.

One benefit of using hybrid scores is flexibility. Rather than rely on only the score for making lending decisions a hybrid score utilizes the score plus other traditional lending information from the data extract such as debt ratio, employment and residence stability and credit experience. Hybrid scores allow the lending guidelines to outperform other scores with greater accuracy in predicting risk. By combining the strengths of both custom and generic score model design the lender in a position to price according to risk and remain competitive in their rates. 

Hybrid scores also permit lending guidelines to be simplified to assure consistency in decision making . Validation of the score’s performance can be made through recapture of the data. Repayment and profitability ratios form the basis for efficient automated approval and denials.

Example of Hybrid Lending/Pricing Guidelines

The example above illustrates a vertical pricing strategy with rates decreasing as the credit scores become higher. Combining the entire range of generic scores to price in each risk range resolves issues related to vertical pricing. 

The underwriting guidelines should be more rigorous for applicants in the higher risk ranges and more liberal as scores increase. Declines based on exceptions to underwriting guidelines should not be greater than ½% of applications processed.

To obtain an estimate and proposal for converting your current credit score lending program to a Hybrid scoring system contact sales@creditscorelending.com.