Credit Scoring and Loan Scoring: Tools for Improved Management of Federal Credit Programs
The paper states that lenders use credit and loan scores to generate loan-level information about a borrower's propensity to repay a particular loan. They measure the borrower's creditworthiness against a representative database, and use the resulting information to decide whether a loan should be made and, increasingly, on what terms.
The paper sheds light on how federal credit agencies can use credit scoring to mitigate the risk associated with lending. It examines the development and application of credit scoring and loan scoring by private lenders and the relevance of those developments to federal credit programs. The paper specifically:
- Examines various applications of credit scoring;
- Looks at larger strategic issues raised by the dramatic increase in the use of scoring-based systems;
- Reviews policy issues relating to credit scoring and special considerations for federal credit agencies as they consider adopting scoring-based systems for purposes of loan administration.
The paper concludes that although information-based technologies create both opportunities and risks for federal credit programs, credit and loan scoring offer opportunities for many federal credit programs to increase their institutional capacity to manage credit risk. Thus, federal credit agencies and their stakeholders must determine how to address the new risks and opportunities.
