The agencies are aware that
over the last year some financial institutions have stopped reporting
certain items of customer-credit information to consumer reporting
agencies (credit bureaus)
1. Specifically, certain large credit card issuers
are no longer reporting customer credit lines or high credit balances
or both. In addition, some lenders, as a general practice, have not
reported any loan information on subprime borrowers, including payment
records. The agencies have been advised that the lack of reporting
is occurring primarily because of intense competition among lenders
for customers.
The agencies note that both financial institutions and
their customers generally have been well served by the long-established,
voluntary self-reporting mechanism in place within the industry. Credit-bureau
information provides a useful and efficient means for financial institutions
to collect data used to assess the financial condition, debt-service
capacity, and creditworthiness of retail borrowers. Institutions rely
heavily on such data in their manual (i.e., nonautomated) underwriting
processes and in their credit scoring models, regardless of whether
those models are proprietary, pooled-data, or credit-bureau models.
Manual underwriting is enhanced and the predictive capabilities of
credit scoring models are more powerful when customers’ credit data
are complete. Thus, where financial institutions rely on such data
in their underwriting and account-management processes, their ability
to make prudent credit decisions is enhanced by greater completeness
of credit-bureau files.
Moreover, institutions that do not modify their credit-risk
management processes to compensate for omitted data in credit-bureau
reports could inadvertently expose themselves to increased credit
risk.
Accordingly, financial institutions that rely on credit-bureau
information as a tool in their underwriting and account-management
functions, whether manual or automated, should have processes in place
to effectively identify and compensate for missing data in credit-bureau
reports and models. Actions financial institutions should take, if
appropriate, to address this issue include the following:
- Assess the effect of incomplete credit-bureau information
on credit-decision processes, including the impact on the predictive
ability of credit scoring and other account-acquisition and -management
models. Financial institutions using credit-bureau scores and other
generic or pooled-data scoring models should obtain information about
the impact of the omitted data on the models’ predictive capabilities
directly from the vendors for such models.
- Develop and implement strategies, such as independent
verification of missing data, to mitigate the effect of incomplete
credit information. For example, changing cut-off scores, neutralizing
or substituting model characteristics, and revalidating or redeveloping
models may be appropriate.
The agencies expect financial institutions to
strive to resolve issues related to consumer credit reporting in a
manner that supports both the safety and soundness of institutions’
credit-risk management and consumer access to credit.
Issued by the Federal Financial Institutions Examination Council
Jan. 18, 2000.
