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Credit scoring and loan default

Geetesh Bhardwaj () and Rajdeep Sengupta

No RWP 15-2, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: A metric of credit score performance is developed to study the usage and performance of credit scoring in the loan origination process. We examine the performance of origination FICO scores as measures of ex ante borrower creditworthiness using loan-level data on ex post performance of subprime mortgages. Parametric and nonparametric estimates of credit score performance reveal different trends, especially on originations with low credit scores. The data suggest a trend of increased emphasis on higher credit scores accompanying a trend of increased riskiness in other origination attributes. Over time, this increased emphasis on credit scoring coincided with deterioration in FICO performance largely due to the fact that higher credit score originations of later cohorts were more likely to have riskier attributes. However, controlling for other attributes on originations and changes in economic conditions, we find that, as measures of borrower ranking, FICO performance on subprime loans over the years remains fairly stable.

Keywords: Subprime mortgages; Credit scoring (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2015-02-01, Revised 2015-02-01
New Economics Papers: this item is included in nep-cfn and nep-ure
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Working Paper: Credit scoring and loan default (2011) Downloads
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