Does your underwriting criteria diminish the predictive power of the credit bureau score? In many developing countries, best practices for scorecard implementation including the process of validating credit bureau scores against actual performance are not common place. Applied Business Intelligence Group recently undertook a custom modeling project for one of the largest financial institutions in Mexico. This particular institution was relatively conservative and their underwriting criteria successfully eliminated many potential "BADs" but at the same time reduced the predictive power of the credit bureau score by 60%.
Why does this phenomenon happen? Credit bureau scorecards are developed across a diverse universe of credits issued by multiple financial institutions. A lender’s credit underwriting criteria define a subset of this diverse universe, which will result in a target population that is either more or less risky than the universe as a whole depending on the lender’s risk appetite. It is not surprising that the predictive power is diminished within the lenders target market due to differences in the between the universe and target population.