Wednesday, December 1, 2010

Credit Character Measures C1

Credit character measures tends to be performed by a
combination of credit scoring (credit scoring models and
credit bureau data) plus tailored credit policy rules as part
of the underwriting decision and of course fraud tests for
direct rejection. Regardless of which party bears
responsibility for diligent underwriting―either broke r,
packager, lender, rating agency, investors or even a fully
automated ‗underwriting system‘―measurement of the
credit character of a borrower is generally considered
paramount, especially for prime borrowers. Before the use
of securitisation funding, the credit provider was usually the
lender who retained the loan risk on their own balance
sheet but with the advent of securitisation, the underwriting
decision now has a degree of coercion from other entities
that profit from loan volumes, and therefore hav e minimal
involvement with the future performance of those loans.
Such a design structure will inevitably increase the
incentive for third-party intermediary credit brokers to write
new loans but also reduces their incentive to consider how
these loans will perform over time. In any efficient
performing market, such problematic practices should self-
correct over time, as originators will become more liable for
creating quality books (e.g., ‗claw-back‘ profit arrangements
on bad deals).


The ultimate aim of the credit character measuring process
is to stratify applicants into meaningful segments or risk
grades that will assist in risk-based pricing. During the
application stage for credit, it will be possible to use
combinations of credit bureau scores coupled with any
available application credit scoring and required policy rule
restrictions and fraud testing elimination. If pricing -for-risk
after acceptance (say at set future intervals), then a
behavioural score in conjunction with a bureau score would
be measures that are more preferable (as behaviour of the
account will be readily available giving a stronger prediction
of risk than from the application score).

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