A Comprehensive Credit Assessment Framework

....................................................................................................... 1 Executive summary ..................................................................................... 2 Introduction ................................................................................................. 5 Historical context ........................................................................................ 6 The underwriting gap ............................................................................... 10 Defining the underwriting gap ............................................................... 10 Identify gap components........................................................................ 13 Data component ....................................................................................... 13 Model factor component ........................................................................... 15 Sampling/segmentation component .......................................................... 16 Model construction and formulation component ....................................... 17 The Comprehensive Credit Assessment Framework ............................. 21 Overview of CCAF ................................................................................... 21 CCAF addresses gap components .......................................................... 22 Interplay of main elements ....................................................................... 32 Role of judgmental credit information ................................................... 33 Use of alternative data ........................................................................... 34 Role of credit scoring ............................................................................. 35 Examples ................................................................................................... 37 Capturing payment history ..................................................................... 37 30-year fixed rate vs. five-year ARM home purchase mortgage ........... 39 Summary and subprime implications ....................................................... 43 Intervention ........................................................................................... 44 Prevention .............................................................................................. 46 Conclusion ................................................................................................. 49 References ................................................................................................. 50 A COMPREHENSIVE CREDIT ASSESSMENT FRAMEWORK