6 FEDERAL RESERVE BANK OF PHILADELPHIA
BUSINESS REVIEW SEPTEMBER/OCTOBER 1997
credit cards and in other types of consumer
lending, such as auto loans and home equity
loans. The Federal Reserve’s November 1996
Senior Loan Officer Opinion Survey of Bank
Lending Practices reported that 97 percent of
the responding banks that use credit scoring
in their credit card lending operations use it
for approving card applications and 82 percent
use it to determine from whom to solicit appli-
cations. About 20 percent said they used scor-
ing for either setting terms or adjusting terms
on their credit cards.
Scoring is also becoming more widely used
in mortgage origination. Both the Federal
Home Loan Mortgage Corporation (Freddie
Mac) and the Federal National Mortgage Cor-
poration (Fannie Mae) have encouraged mort-
gage lenders to use credit scoring, which
should encourage consistency across under-
writers. Freddie Mac sent a letter to its lend-
ers in July 1995 encouraging the use of credit
scoring in loans submitted for sale to the
agency. The agency suggested the scores could
be used to determine which mortgage appli-
cants should be given a closer look and that
the score could be overridden if the under-
writer determined the applicant was a good
credit risk. In a letter to its lenders in October
1995, Fannie Mae also reported it was depend-
ing more on credit scoring for assessing risk.
Both agencies have developed automatic un-
derwriting systems that incorporate scoring so
that lenders can determine whether a loan is
clearly eligible for sale to these agencies or
whether the lender has to certify that the loan
is of low enough risk to qualify (Avery and co-
authors).
Private mortgage insurance companies, such
as GE Capital Mortgage Corporation, are us-
ing scoring to help screen mortgage insurance
applications (Prakash, 1995). And it was re-
cently reported that four mortgage compa-
nies—Chase Manhattan Mortgage Corp., First
Nationwide, First Tennessee, and HomeSide—
are involved in a test of the use of credit scor-
ing models for assessing mortgage perfor-
mance, prepayments, collection, and foreclo-
sure patterns (Talley). This test is being con-
ducted by Mortgage Information Corp.
A growing number of banks are using credit
scoring models in their small-business lending
operations, most often for loans under
$100,000, although scoring is by no means uni-
versally used.
3
It has taken longer for scoring
to be adopted for business loans, since these
loans are less homogeneous than credit card
loans and other types of consumer loans and
also because the volume of this type of lending
is smaller, so there is less information with
which to build a model.
The first banks to use scoring for small-busi-
ness loans were larger banks that had enough
historical loan data to build a reliable model;
these banks include Hibernia Corporation,
Wells Fargo, BankAmerica, Citicorp,
NationsBank, Fleet, and Bank One.
BankAmerica’s model was developed based on
15,000 good and 15,000 bad loans, with face
values up to $50,000 (Oppenheim, 1996); Fleet
Financial Group uses scoring for loans under
$100,000 (Zuckerman). Bank One relies solely
on scores for loans up to $35,000 and approves
30 percent of its loans up to $1 million by
scorecard alone (Wantland). This spring, a re-
gional bank in Pennsylvania began basing its
lending decision for small-business loans up
3
A survey reported in the American Banker in May 1995
with responses from 150 U.S. banks indicated that only 8
percent of banks with up to $5 billion in assets used scoring
for small-business loans, while 23 percent of larger banks
did (Racine). The smaller banks were less inclined to adopt
scoring, citing small loan volumes. Fifty-five percent of
banks with more than $5 billion in assets reported they
planned to implement scoring in the next two years. In a
more recent survey of larger banks—the Federal Reserve’s
January 1997 Senior Loan Officer Opinion Survey on Bank
Lending Practices—70 percent of the respondents, that is,
38 banks, indicated that they use credit scoring in their
small-business lending, and 22 of these banks said that they
usually or always do so.