BRUSSELS 2007! Workshop 4: "Scoring and Social Discrimination in Credit Contracts" - Abstract from Mr Wilkinson W4: SCORING AND SOCIAL DISCRIMINATION IN CREDIT CONTRACTS George Wilkinson (George Wilkinson associates, Independent Credit Industry Specialist) THE LENDERS’ DILEMMA • LENDERS have: – high operating costs (branch/staff/IT/etc) – unwelcome bad debt losses (significant?) • CREDIT DECISIONS need to be optimal: – declining good payers makes no sense – accepting bad payers creates losses • CREDIT SCORING is a forecasting tool: – highlights groups of potentially good, bad and average payers – seeks to decline high risks (unprofitable) and accept good ones at an economical cut-off point • PROCESS is not perfect: – but works better than traditional methods – has economic – cost and process benefits (World Bank) – is fairer and minimises wrong decisions (most regulators) Majority of lending decisions are to the right people who can and do pay back – but not all apply - and not all appear to qualify (evidence) SCORING TODAY • SCORING WAS: – largely based on application form information (which can be altered) and some interpretation of past experience • SCORING IS: – increasingly based on a large number of individual credit experiences (held on CRAs) – which is more up-to-date/accurate • SCORING IS NOT: – good at deciding on those with little or no credit records • SCORING NEEDS TO BE: – Capable of using a wide variety of positive payment experiences from those with little or no experience posted on CRA files Scoring cannot grow up – or widen its capability to lend to the financially excluded without more and better data – with or without scoring ROLE OF CREDIT REFERENCING • In the UK lowest income quartile – there are many thin and empty CRA files (circa 7m to 9m) • The UK has absorbed mobile, mail order and soon will have home credit on its files (circa 15m – and better than most countries) • The higher income quartiles – can have between two and six accounts per consumer - and sometimes more • All this data provides an objective and safer way of lending for consumer/lender alike • Mail order/court judgements/home credit/voters roll helps a significant number of lower income applicants to gain credit they can afford CRAs are becoming increasingly aware of the needs of the lower quartile – despite having done an excellent job for the bulk of consumers HOW IS WIDER DATA MADE AVAILABLE? • HOUSE RENTAL DATA – is available but not currently allowable or usable – is a significant element for almost a third of the population – and demonstrates stability, financial capability • UTILITY BILLS ARE – another area where data sharing appears to be harder to achieve or allowable – despite virtually every household making payments – majority on time • LOCAL AND NATIONAL TAXATION RECORDS ARE – available/usable in some countries (Scandinavia) – but frowned upon in UK and elsewhere a) Electoral information is usable by the credit industry – exceptionally – and in the public interest – but this is very UK specific b) Data protection rules – high cost of processing – lack of lender interest in smaller balances/higher risk lending – inhibits data collection SUMMARY • LENDERS AIM TO: – ‘optimise’ lending – but at an acceptable ‘cost’ – build ‘scale’ to improve cost – close or substantially modify ‘unprofitable operations’ – ‘borrow’ at/close to market rates – and effectively ‘re-lend’ – incur ‘losses’ on defaulters and write-offs – scoring helps minimise • CONSUMER BODIES IMPLY THAT LENDERS ARE: – too lax – too tight – too expensive • SCORING HELPS TO: – set the balance between credit losses and income – increasingly uses credit reference data – as a component – helps more of the right decisions to be made – increasing availability • BUT: – lower income/lower socio-economic groups have little or no credit history – how do we ensure that good payments are recorded and available? House rental – utility and mobile phone payments are critical to fair credit decisions – but many barriers exist to their use in credit scores. ID: 40037 Author(s): iff Publication date: 14/09/07     Workshop 4: Scoring (Mr Wilkinson) (31232 Bytes) URL(s): Back to main conference website (en) Back to Workshop 4 Outline

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