Customized credit scoring helps manage risk. Subject(s): PARTNERSHIP; COUNTER Intelligence Associates (Company); BETHPAGE Federal Credit Union; CREDIT unions; EXPERIAN Inc. Source: Credit Union Magazine, Jul2000, Vol. 66 Issue 7, p45, 3p Author(s): Meli, Jeff Abstract: Focuses on the partnership formed by Bethpage Federal Credit Union with Experian and Counter Intelligence Associates to build a credit scoreboard that will increase approval rates and reduce delinquencies and losses. Development and design of the credit scoreboard solution; Implementation of the credit scoreboard. AN: 3375549 ISSN: 0011-1066 Database: Business Source Elite Print: Click here to mark for print. [Go To Citation] Section: SERVICE SOLUTIONS PRODUCT UPDATES CUSTOMIZED CREDIT SCORING HELPS MANAGE RISK Bethpage Federal says it boosts loans and lowers delinquencies Changing market conditions continually challenge credit unions to adopt better technologies and strategies to serve members while minimizing overall risk. One effective tool is credit scoring. Many credit unions have gone beyond traditional generic scores and developed custom scoring systems based on their own applicant pool. When developed and implemented to suit the lending environment, and then monitored effectively, these systems provide significant benefits. TWO CONFLICTING OBJECTIVES Bethpage (N.Y.) Federal Credit Union is the state's fifth-largest credit union, with more than 93,000 members and $980 million in assets. Through the mid-1990s, Bethpage Federal experienced a decline in its primary membership as a result of downsizing and layoffs. Meanwhile, changing competitive conditions encouraged the credit union's more creditworthy members to go elsewhere for better rates, leaving a disproportionate percentage of less-creditworthy members. The credit union responded by incorporating new sponsor groups, but realized some critical improvements were necessary to improve its loan portfolio, boost loan application volume, and stem the rising tide of delinquencies. To remain competitive, the credit union needed to adjust its loan pricing, streamline the loan-origination process, and better differentiate members of varying creditworthiness. The credit union called on Experian in Orange, Calif. (714-385-5827; www.experian.com), and Counter Intelligence Associates in San Juan Capistrano, Calif. (800-424-4951; counterintel.com) to create a solution to tackle two seemingly conflicting objectives: increasing approval rates while reducing delinquencies and losses. The credit union determined a custom scorecard built on its own portfolio data would be the optimal solution. DESIGN & DEVELOPMENT Bethpage Federal worked with Experian to design a sample of applications that best reflected its applicant pool. The first step was to construct definitions of bad and good performance based on the credit union's experience. Portfolio reports were then generated for each product incorporated into model development. Based on the performance definitions and portfolio counts, the credit union selected a representative sample of the applicant pool for model development, excluding applicants or product types that wouldn't be scored by the model when implemented. All applicants in the sample fell within a time period recent enough to reflect the credit union's current applicant pool, yet mature enough to meet aging requirements for good accounts and to incorporate a sufficient sample for modeling. As is typical for applicant scoring systems, Bethpage Federal included application, credit bureau, and performance information in the sample. All application and credit bureau information was collected from the date of the loan decision, while performance information was collected from throughout the life of the loan. Experian assessed the sample for data integrity, weighted the sample counts to reflect the actual portfolio, and used inferencing techniques to assign performance to the declined accounts. The sample was then divided into an analysis sample and an independent test sample. A preliminary model was developed based on the analysis sample, and the model was then validated on the test sample to ensure effectiveness on an independent population. The intent of the preliminary model development was to build the strongest statistical model. Even the best statistical solutions, however, can fail if they're not logically valid, operationally effective, or easy to implement and use. To ensure the solution would function effectively, the credit union and Experian discussed the model's components and fine-tuned it. All desired model adjustments were tested for their impact on model performance, allowing the credit union to weigh the importance of a modification against its effect on the model. This process occurred in an interactive fashion until all desired changes were made. Only when both parties were satisfied by the result was the model finalized. IMPLEMENTATION & MONITORING Bethpage Federal obtained the model specifications from Experian and initiated the implementation process with its application processor. Once the model was programmed, Experian audited the model and its individual characteristics to ensure compliance with the specifications. Meanwhile, the credit union set minimum scores in line with model performance forecasts Experian provided. Applicants scoring in the upper ranges of the scorecard received automatic approvals, dramatically increasing loan-processing efficiencies. The credit union also conducted training and user acceptance sessions to prepare the credit union for the scoring model's introduction. Once auditing and training were complete, the model was ready to go live. The credit union implemented the scorecard in August 1998, and later worked with Counter Intelligence Associates to introduce a risk-based pricing program. From the date of implementation, the credit union has been dedicated to achieving maximum benefit from the scorecard, both from a loan volume and a risk perspective. On a quarterly basis, the credit union sends Experian a data file containing all accounts booked since scorecard implementation. Each of the variables in the scorecard, along with a worst-performance indicator, is included. Experian then monitors trends in population stability, scorecard adherence, and scorecard effectiveness. If any red flags appear, Experian alerts the credit union and suggests alternative credit underwriting approaches. PRELIMINARY RESULTS As of the first quarter of 2000, the scorecard is performing well. As anticipated, the credit union has seen some minor shifts in the overall population distributions, but the model has met or exceeded expectations. Since scorecard implementation, loan approval rates have increased from 60% to 65%, and the credit union's loan-to-share ratio has grown from 47% to 51%. Approved loans that scored below the cutoff show delinquency rates about four times those of approved loans that scored above the cutoff. Delinquency rates of loans that have been on the books at least one year are in the 1% to 2.5% range on the model development population. This percentage is expected to increase as these accounts age, but early indications are promising. Overall, the investment in a custom scorecard has already paid dividends for Bethpage Federal. "Our new applicant scorecard is an effective tool that has enabled us to improve turnaround time for applicant decisions, offer convenient 24/7 loan approval, increase our approval rates, and reduce losses," says Kirk Kordeleski, the credit union's president/ chief executive officer. So long as no major economic shifts occur in the near future, the scorecard will probably perform at this level for many quarters to come. When the scorecard first exhibits a measurable and sustained drop in performance, the credit union will consider a model adjustment. Because Experian already receives data on a quarterly basis and the credit union has the model components programmed, any model updates should be accomplished quickly. ~~~~~~~~ By Jeff Meli Jeff Meli is a project manager in the custom analytical solutions group of Experian Strategic Solutions' Atlanta office. He can be reached at 404-841-1436 or at firstname.lastname@example.org. Copyright of Credit Union Magazine is the property of Credit Union National Association, Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Source: Credit Union Magazine, Jul2000, Vol. 66 Issue 7, p45, 3p.