Credit scoring today

RMA Journal, The, Sept, 2005 by Kathleen M. Beans

During a recent RMA audioconference, two business-banking executives discussed how credit scoring has evolved at their institutions--Hibernia and AmSouth Bank--and the efficiencies it has created. John O'Connor, commercial practice manager, Benchmark Consulting International, moderated the discussion. What follows is a summary of their remarks.

Fewer people are involved in the loan origination and approval process today, thanks to efficiencies resulting from credit scoring. Over the past 10 years, many institutions began using an automated, score-only process to decide loan requests under $25,000. That number has been creeping higher as institutions gain confidence in the ability of credit scores to predict success in the loan portfolio.

How Scoring Evolved at Hibernia

Hibernia, a $22 billion institution operating in Louisiana and Texas, began using a judgmental scorecard by Fair Isaac to process small business loans in 1993. At the time Hibernia had 1,500 accounts in its $150 million small-business portfolio. Danny Hebert, senior vice president and manager of Hibernia's business banking center, said his institution was one of 17 banks that participated in the development of Fair Isaac's first pooled scorecard, which Hibernia began using in 1995.

In 1997, when it had 10,000 accounts in a $1 billion portfolio, the bank was using the scorecards to make small-business credit decisions on loans up to $50,000 without requiring financial statements.

In 2003, Hibernia introduced its own custom score. It currently has a $3 billion portfolio and 50,000 accounts.

Factors for Success

Hebert attributes Hibernia's successful credit-scoring program to these factors:

* Dedicated resources for scorecard management, including reporting and analytics on scorecard performance, especially overrides, and performance by score bands as well as scorecard modeling and validation.

* Vigilance in catching input errors and performing ongoing audits for that purpose.

* Clean data capture and coding.

* Understanding and buy-in of credit scoring by the sales force and central-lending units, especially management.

How Scoring Evolved at AmSouth

AmSouth Bank, a $50 billion regional bank in the Southeast, began credit scoring in 1995 with a FICO pooled card. Two years later it began using only credit scores to decide loans up to $35,000. When it introduced its custom scorecard last year, AmSouth increased its score-only threshold to $100,000 for certain product lines.

"Data verification and validation are a highly critical aspect of this process," said George F. Buchanan, senior vice president and business-banking senior credit officer, AmSouth Bank. "We have a dedicated resource team that analyzes the ongoing credit quality and the makeup of all the score components. Much of our data entry on loan applications is handled remotely, so we have a quality-control team that reviews the applications to ensure that all the data is entered correctly. This review is very important for validation. It is necessary to have good quality data on the front-end."

Hibernia was using a centralized system to input applications at the time of the audioconference, but Hebert said it would move to remote input of application data in the second quarter. "A lot of banks are now pushing this function out to the sales force, essentially eliminating data reentry," said Hebert. "At Hibernia we're now scoring all applications up to $250,000. In our small-business portfolio, loans under $250,000 represent approximately 80% of the loans."

Of the many efficiencies resulting from Hibernia's highly automated process, Hebert said the most important is that fewer people are involved in the origination and approval process for 80% of its loans.

The Decision Process

"Driving some of our efficiencies and success on the origination side is how we stratify our decision processes," Hebert explained. "We have several dedicated underwriting units based on the dollar size of the credits under consideration and the amount of due diligence required. We have one underwriting segment that is dedicated to credit decisions up to $50,000 based purely on scores. We use a second underwriting group that decisions credits from $50,000 to $250,000. That decision process involves a credit score and one year of financial statements and tax returns on borrowers and guarantors. It's still a very quick process, still very score dependent, but there are some overlays.

"For loan decisions over $250,000, we use more traditional underwriting techniques and have two underwriting groups. One group considers credits from $250,000 up to $500,000. For those, we use a very simple, almost checklist-type underwriting. From $500,000 on up to our limit of $5 million, we use a more traditional, but streamlined, analysis."

Buchanan said AmSouth has two groups in its underwriting center. "We have an objective underwriting team for the first tier, score-only / score-plus process. This group also handles some of our score-plus applications, looking at a few other elements in addition to the scores. Our subjective underwriting team is much more traditional. Like Hibernia, it has a graduated process for evaluation. For transactions between $100,000 and $250,000, it's very streamlined but escalates in complexity as the loan amount requested increases."