An Operations-Research Study of the Collection of Defaulted Loans

Morton Mitchner and Raymond P. Peterson
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Morton Mitchner: Arthur D. Little, Inc., San Francisco, California
Raymond P. Peterson: Operations Research Section, Controllers Department, Bank of America Headquarters, San Francisco, California

Operations Research, 1957, vol. 5, issue 4, 522-545

Abstract: Statistical decision techniques are developed for loan screening that provide a guide as to how long nonpaying defaulted loans of various types should be pursued by adjusters or collectors before they are completely dropped as uncollectible. A mathematical model yields the optimum pursuit duration and maximum expected net profit for each type of delinquent loan considered and which, if followed, will maximize the over-all net profit of a loan adjustment or collection department. The application of these rules by simulation to a random sample of defaulted loans indicates a potential increase in net profit of approximately 33 per cent.

Date: 1957
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