AccessMyLibrary provides FREE access to millions of articles from top publications available through your library.
A scorecard is a tool used to calculate the risk associated with a credit application. It calculates credit risk based on multiple items of information called characteristics. Characteristics can come from several sources, including the credit application and consumer and business credit reports. Each characteristic is divided into two or more possible responses known as attributes. A numerical score is associated with each attribute, so for any credit application, the numerical attribute values for all characteristics can be added together to provide a total score.
RMA and Fair, Isaac recently developed two pooled-data scorecards to meet the needs of a wide range of small business customers. RMA member banks supplied the data and credit expertise, and Fair, Isaac supplied the data analysis and modeling ability.
The pooled-data scorecards give small business lenders a cost-effective means to obtain substantial predictive power in screening applications. The objective and consistent decision-making support offered by scoring is valuable to small business lenders for a number of reasons.
The Value of Small Business Scorecards
Scoring uses the same data a loan officer uses in his or her judgmental, or nonscoring, decision process. But scoring is faster, more objective, and more consistent. With the current regulatory pressure to provide more small business loans, prospective lenders need efficient, time-saving, cost-cutting tools. Processing credit applications quickly - and with accuracy - is the key to making small business lending more efficient. With credit-scoring, a lender can increase the number of approved applications without increasing risk, time, or other resources.
A recent article in American Banker focused on the trend of using credit-scoring technology in small business lending to expedite loan processing, for marketing purposes, and to reduce costs and processing time. In the article, industry experts predicted that a retail-style loan approval process will ultimately cut credit underwriting time from an average of 12 hours to as little as 15 minutes per loan.(1)
Scoring does not require an either/or approach. Loan officers can use scoring in conjunction with traditional judgmental appraisal methods. Scoring can quickly identify and approve loans to very low-risk business applicants and decline loans to very high-risk business applicants. This process leaves loan officers with …