Community banks are dropping their resistance to credit scoring in their small-business activities.

In a sign that the loan-evaluation technology is continuing to infiltrate areas outside its historical consumer base, a growing number of community bankers are modifying their anti-scoring bias.

The vast majority of banks with less than $3 billion of assets do not use credit scoring - and many will always consider it inimical to their first-hand knowledge of customers and markets.

But some see the technique as a way to make the lending process more efficient without violating the "high-touch" principles that differentiate small banks from their larger brethren.

Seen in this light, the credit-risk score that results from the automation of credit analysis can be used as a guideline - though not the final arbiter - in making final loan decisions.

"We would probably use it as a tool in looking for indicators, like a screening device," said William Gossett, president of Liberty National Bank in Longwood, Fla., which still does not use credit scoring in small- business lending. "As far as our being able to centralize and take people out of the offices and rely on a computer exclusively, I don't ever see that."

Albert B. D'Allessandro, executive vice president at Franklin National Bank, said his Washington-based institution is intrigued by the notion that credit scoring can quickly separate loan applications into obvious approvals, obvious disapprovals, and everything in between.

The applications then would receive appropriate attention from loan officers, he said.

"It would help us cut down on the time it takes to make small-business loans," he said.

Mr. D'Allessandro said "there's a pretty good chance" that Franklin will someday adopt credit scoring, and he expects his peers will as well.

"I think the trend certainly is going to go that way," he said. "Everybody needs to be more efficient. It just makes sense."

The leading provider of credit-scoring systems to financial institutions, Fair, Isaac & Co., rolled out its small-business product last March. Since then, 173 banks and leasing companies have acquired it, said Latimer Asch, the company's director of commercial products.

Almost all the Fair, Isaac users have more than $3 billion of assets, which fall within the San Rafael, Calif., company's general target range, Mr. Asch said.

Fair, Isaac also expects to set its sights on the thousands of smaller community banks. But Mr. Asch isn't expecting spectacular results, at least not at first.

"I think community banks have been less willing to embrace credit scoring than some of the larger players," he said. "Community banks tend to focus a little bit more on their relationships with their customers."

Charles B. Wendel, a New York-based banking consultant and small- business expert, said credit scoring helps regional banks make quick credit decisions about borrowers they may not know well or personally. Because community banks are - or ought to be - intimately familiar with their business environment, they generally should know who is a good risk.

"Good community banks have an good understanding of the local customer base," said Mr. Wendel, president of Financial Institutions Consulting. "Community banks should know the characteristics of their borrowers."

Indeed, City National Bank in Taylor, Tex., acquired a scoring system last year because it wants to go outside its traditional market and start serving businesses in the nearby capital city of Austin.

Jim Jirasek, vice president for lending, said scoring helps it make decisions quickly, monitor current loans, and make sound credit decisions in an area that the bank had previously regarded as terra incognita.

Mr. Jirasek lamented a somewhat slack loan demand, but said the credit- scoring system is effective.

"We're well equipped with the program," he said. "We just need to use it more."

The bank spent about $6,000 for the system, Mr. Jirasek said.

"We figured if it saved us from making one bad loan, particularly to a new customer, we were dollars ahead," he said.

Mr. Jirasek added that a few other banks have made inquiries about the system.

If anything leads community bankers to credit scoring, it will be their quest for efficiency.

"There's a fine line that the small banks have to travel," Mr. Wendel said. "They have to have some level of efficiency and still make sure the customer has a personal relationship."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.