OCC BULLETIN 1997-24
Subject: Credit Scoring Models
Date: May 20, 1997
To: Chief Executive Officers of all National Banks, Department and Division Heads, and All Examining Personnel
Description: Examination Guidance
As of November 4, 2015, this guidance applies to federal savings associations in addition to national banks.
This banking bulletin is intended to inform national banks of the OCC's concerns about national banks' use of credit scoring models. If used properly, credit scoring models (also called score cards) can be effective portfolio and risk management tools.
Credit scoring models were first developed more than 50 years ago. Their use has increased tremendously as a tool for underwriting and administering all forms of retail credit, including credit cards, direct and indirect installment loans, residential mortgages, home equity loans, and small business credit. Credit scoring models can offer a fast, cost-efficient way to make sound decisions based on bank or industry experience.
Different types of credit scoring models are used for various activities. Application scoring models apply the bank's definition of good and bad accounts to identify and rank applicants. Behavioral scoring models are used to manage accounts, including credit line increases and decreases, over limits, and renewals. Collection scoring models may help determine accounts that are more likely to be collectible, and profitability scoring models are used to identify the most profitable marketing segments. Fraud detection and bankruptcy scoring models help identify accounts with possible fraudulent activity or borrowers likely to go bankrupt.
Credit scoring models can assist bankers with credit decisions. As stated in the OCC's Credit Card Lending Handbook, credit scoring models can help manage loan portfolio activities. A copy of that handbook was distributed to each bank in October 1996.
Credit scoring models can be used effectively to:
Control risk selection.
Bank Management Responsibilities
As with any models, bank management must ensure that credit scoring models are used appropriately. Bank management must:
Understand the credit scoring models thoroughly.
Over the past several months, examiners have identified some bank practices that resulted in the improper use of credit scoring models. The OCC is providing information about these practices to help other banks avoid similar experiences. Some problems that examiners have seen include:
Bank staff inadequately trained to monitor effectively the credit scoring model's performance.
OCC examiners, in discussions with bank management, should:
Determine if the bank is using credit scoring models.
National bank management should evaluate its current use of credit scoring models and ensure that it is taking appropriate action to mitigate potential risks.
The attached Appendix contains more detailed guidance on the safety and soundness and compliance issues seen by OCC examiners in some institutions. Please refer bank staff responsible for credit scoring models to this information.
For further information, contact Credit & Market Risk (202) 649-6670.
Emory Wayne Rushton