Credit scoring, already finding wide acceptance as a mortgage underwriting tool, may soon be applied to improving the efficiency of loan servicing.
In evaluating loan applications, credit scoring systems mathematically apply points to various touchstones of a customer's credit records, resulting in a single number that rates the creditworthiness of the borrower.
Scorecards can also be custom designed to measure other specific borrower tendencies and can accommodate loan application information as well as cross-referencing other data, such as demographics or actual payment history.
Freddie Mac and Fannie Mae now use credit scoring in portfolio reviews, and the federal government requires the use of scoring for all loans backed by the Small Business Administration.
Despite the broad recognition of the value of scoring, its potential in the servicing end has received little attention.
"The mortgage industry, in general, has not been as automated as others," says David Shellenberger, an executive with Fair, Isaac & Co., the leading developer of credit-scoring systems. "It's still a labor-intensive loan."
The outlook for improved servicing of mortgages appears promising considering applications for other types of loan servicing. The procedure's strength is its ability to effectively segment a servicer's portfolio, particularly in the early stages of delinquency.
By distinguishing a high-risk from a low-risk delinquent, servicers can better target their collection efforts. "High-risk accounts might be treated as if they've missed two payments rather than one," said Mary Blake, another Fair, Isaac executive. "Servicers can actually delay effort for low risks," thus saving money, she said.
For installment lending, the procedure has been successful so far, Ms. Blake says. The goal is to determine risk as early as possible so the servicer can apply loss-control techniques. Even a borrower paying loans on time may merit special attention if a delinquency is reported in another account, she said.
"With an installment lender, their loans are usually the first paid, so they won't always know when someone is in trouble elsewhere."
In mortgage servicing, the secondary market and multiple-party involvement make it necessary to organize new procedures more thoroughly, Mr.Shellenberger said. So it is taking the servicers a bit longer to get up to speed. But extensive use of scoring by servicers "is on the horizon," he said.
