Credit scoring systems are usually based on discriminant models or related

Credit scoring systems are usually based on

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Credit-scoring systems are usually based on discriminant models or related techniques, such as logit or probit analysis or neural networks, in which several variables are used jointly to establish a numerical score for each credit applicant. If the applicant’s score exceeds a critical cutoff level, he or she is likely to be approved for credit in the absence of other damaging information. If the applicant’s score falls below the cutoff level, credit is likely to be denied in the absence of mitigating factors. 18-5. What are the principal advantages to a lending institution of using a credit-scoring system? The credit scoring method has the advantage of being objective, requiring less loan officer judgment, possibly lowering loan losses, and lowering operating costs when a large volume of consumer loans is processed.
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18-6. Are there any significant disadvantages to a credit-scoring system? Credit scoring systems do not take into account motivational factors or individual differences and may become outdated unless frequently retested for statistical accuracy. 18-8. What is FICO and what does it do for lenders? Why is this credit-scoring system so popular today? FICO is a credit scoring system developed by Fair Isaac Corporation. It is fast, objective and impartial and that makes it very useful for regulated financial institutions. 18-9. What laws exist today to give consumers fuller disclosure about the terms and risks of taking on credit? The following federal laws give consumers who are borrowing money fuller disclosure about the terms and risks of taking on credit: a. Truth-in-Lending Act, 1968 b. Fair Credit Reporting Act c. Fair Credit Billing Act, 1974 d. Fair Credit and Charge-Card Disclosure Act e. Fair Debt Collection Practices Act The Truth-in-Lending Act makes household borrowers better informed about the terms of credit so they can shop around. The Fair Credit Reporting Act gives individuals easier access to their credit-bureau records and the right to challenge information contained therein and to insist on the prompt correction of errors. The Fair Credit Billing Act gives consumers the right to dispute billing errors and have those errors corrected. Fair Credit and Charge-Card Disclosure Act informs any change in credit card insurance coverage or fees by direct mail, by telephone, or through advertisements that reach the general public. The Fair Debt Collection Practices Act limits how far a creditor or credit collection agency can go in pressing that customer to pay up. 18-10. What legal protections are available today to protect borrowers against discrimination? Against predatory lending? The Equal Credit Opportunity Act outlaws discrimination in lending based on race, age, sex, religious preference, receipt of public assistance, and similar factors. The Community Reinvestment Act requires banks and other lending institutions to make an "affirmative effort" to serve all segments of their designated market areas without discriminating against certain neighborhoods.
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  • Fall '16
  • Thu Trang
  • Debt, Financial services, Mortgage loan, Deposit account

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