Sophisticated credit scoring techniques can help banks prepare for new risk-based exams, according to bankers and vendors at a recent consumer lending conference.

"One of the best ways to understand risk involved with loans is through scoring," said J. Stephen Darsie, senior vice president at CCN, an Atlanta- based software firm. "It gives you a way to prove that you're being objective in your decision-making."

Understanding and controlling risk has never been more important from a compliance standpoint. Bank regulators have started examining much more than credit risk, checking how a bank handles up to nine separate risks.

That has banks scrambling for the best risk-management system. Observers at a consumer credit conference sponsored by the American Bankers Association and America's Community Bankers here last week said credit scoring can help.

These observers said credit scoring can be an integral part of how banks manage compliance risk, reputation risk, and credit risk by eliminating the chance that an employee's biases will affect a loan decision.

With credit scoring, a bank assigns point values for the amount of a borrowers' salary, time at their current job, level of debt, and other factors. The loan officer - normally working from a computer program - totals the points, using information from applications, credit reports, interviews, and other sources. If a borrower's score meets or exceeds the minimum set by the bank, the loan will be made.

Michael A. Freeman, vice president of risk management at First Union National Bank in Charlotte, N.C., said scoring systems can dramatically reduce credit, compliance, and reputation risk by ensuring similarly situated customers are judged by the same standards. That reduces the chance the bank will violate fair-lending laws or make bad loans, he said.

"With credit decisions, there are lots of shades of gray," said Mr. Freeman. "Scoring can help. You have to focus your training on teaching the cut-off scores, but also on the relative risk involved in each score."

Credit scoring also can help banks meet their Community Reinvestment Act obligations, Mr. Freeman said. First Union automatically reviews rejected borrowers to see if they may qualify for a CRA loan program, he said.

Credit scoring isn't foolproof, experts warned. Out-of-date systems can cause the banks to reject qualified minority applicants or make bad loans. That would increase the risk of compliance problems or publicity that could damage the institution's reputation.

Mr. Darsie banks should address this problem in their compliance, credit, and reputation risk policies. The easiest solution is to assign at least one person in the risk management department to credit scoring, he said. This person should ensure that the bank reevaluates the model at least once a year to account for recent demographic and other changes, Mr. Freeman said.

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