Banks are nearing the end of the line when it comes to implementing credit scoring to wring efficiencies out of the small business lending model, according to preliminary findings of the 1998 Small Business Banking study conducted by the Consumer Bankers Association and Furash & Co.

The number of financial institutions surveyed that use credit scoring as part of the small business lending process has almost topped out: In the 1998 survey, 91 percent of respondents said they used it, compared to 69 percent in the 1997 study. The industry consensus backs the RMT/Fair, Isaac model with 90 percent of respondents employing it. "Last year we saw an enormous focus on trying to get credit scoring in place, this year most of the banks that are going to do it are pretty comfortable with it," says Kathleen C. McClave, CEO of Furash & Co. "And as they've gotten more comfortable, they're increasing the average loan size on which they'll use it."

The median loan size scored increased dramatically between the 1997 and 1998 surveys, from $100,000 to $150,000.

In 1997, survey results showed the median balance threshold to earn an acceptable profit on a small business loan was $25,000. The group that was able to earn a significant profit on smaller loans did so because of efficiencies gained through automation and technology. That theory held true in 1998, where 36 percent of the banks with profitable small business loans of less than $25,000 use Internet banking, versus 14 percent of those banks whose median profitable loan size was above $25,000.

The next logical step: the securitization of small business loans. "You can almost smell it in the survey results," says McClave.

The efficiencies and standardization that are being built into small business loans will likely lead to the securitization of the market, whether banks like it or not, McClave says. "The reason it's not going like crazy like you saw in the mortgage world is because the banks like to portfolio these loans," she says. "They haven't felt the need or wanted to securitize these loans, but the nonbank competitors could force that because they don't want to portfolio these loans."


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