More banks are using credit scoring to speed evaluations of small- business loan applications, but most customers don't like the idea.

Out of 400 owners in the 1997 American Banker survey of small businesses, 53% said they would be less likely to choose a bank that uses credit scoring. Only 7% said they would be more likely.

That creates a dilemma for bankers. Many say they feel pressure to use credit scoring to compete with banks that are making loan decisions in minutes or seconds. On the other hand, they don't want to alienate customers accustomed to face-to-face contact.

"I don't think you ever gain anything by conveying to your customers that you are treating them as a number, which is basically what you do with credit scoring," said Ronald L. Britz, vice president of TCF Bank, Minnesota. Nevertheless, Mr. Britz said, TCF plans to begin using credit scoring this year to reduce the cost of making small-business loans.

"We've got to get into credit scoring because we can't afford to involve a lot of expensive underwriters," he said.

More than two-thirds of banks use credit scoring for small-business loans, up from half in 1996, according to the Consumer Bankers Association.

But in the American Banker survey, conducted by Financial Institutions Consulting of New York, 44% of respondents thought people at their banks' headquarters make the loan decisions. Twenty-three percent ascribed them to branch managers, and 10% to platform personnel.

Only 22% said they thought their banks used credit scoring.

Latimer Asch, vice president of commercial products for Fair, Isaac & Co., the credit scoring pioneer, said most entrepreneurs would be pleased to know that the technique has reduced the cost of making loans and helped banks make more of them.

"The real question for small-business owners should be, 'Would you rather have your loan decision made by computer, or not have credit available?'" Mr. Asch said.

Banks that do not use credit scoring often ask borrowers for three years of business tax returns, whereas many banks with credit scoring use easily completed one-page applications.

In addition to reducing costs, credit scoring guards against discrimination, by using consistent criteria to evaluate borrowers, Mr. Asch said.

He said most small-business lenders use credit scoring to make the most clear-cut approvals or denials, but subject more than 20% of the loan decisions to personal evaluation.

Traditional bankers say they are under pressure to compete with banks that, like Wells Fargo & Co., are heavy users of the computerized technique.

Wells uses it to prequalify people to whom its offers loans by mail. The bank began mailing the pre-approved loan offers nationwide in February 1995; by mid-1996 its portfolio of small-business loans had ballooned to $3.9 billion, from $1.4 billion in mid-1994.

With big banks using scoring that way, small ones "need it to compete," said Frederick A. Volk, vice president of Staten Island (N.Y.) Savings Bank.

Mr. Volk said his bank will begin using credit scoring in three weeks and will aggressively market its simplified applications and 24-hour turnaround time.

Staten Island Savings has no plans to explain to customers how credit scoring works. Besides, Mr. Volk said, as long as they get their loans they "couldn't give a hoot where the money comes from."

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