Scoring and Modeling Scorecard is a statistical model that attributes a number (score) to a customer which corresponds to a probability that

the customer exhibits certain behavior in the future. A most widespread type is an application scorecard which predicts the probability of a person default on the borrowing. Objective of the scorecards can vary depends on the department; A behavioral scorecard predicts the probability of an existing account turning bad; A response scorecard predicts the probability of a person likely to respond to an offer; A collection scorecard predicts the probability of a customer pays back the owed money. Development of scorecard is a detailed statistical procedure typically using logistics regression and other procedures in SAS. Application Scoring It is said that past behavior can predict the future. Credit Scorecards use past behavior/attributes to try an predict what behaviors/attributes are more likely to default than others. As a rule, we want to demonstrate of stability, i.e. consistent income stream, lived in the same location and been able to consistently pay rent, have a steady job. When mobile phones first came out, people with mobile phones were found to be better customers, as they had the capacity to pay for the expensive technology. When an applicant for a loan comes into the bank, the bank wants to calculate the likelihood that the applicant will pay their loan back on time or will end up defaulting.

Application Scorecards Reject inference is used to assign a good or bad to applications that were rejected by the bank or who decided not to take up the loan. We do this to remove sample bias, as otherwise our population would only be all the accepts (good customers) Logisitc Regression Proc logistic You run a logistic regression against your good/bad flag Steps 1. Define Bad Definition i.e 90 Days past due, Write Off etc Step 2. Apply exclusions that is accounts with any irregular behaviour i.e specific product types, abandoned accounts, accounts less than a material definition

Tersm to Know: GINI ROC Recieiver Operator Curve K-S Kolmogrov-Smirnov Statistic WoE Weights of Evidence Natural Log of (Distribution of Goods/Distribution of Bads) = LN(GOODS/BADS) KGB = Known Good Bads KGBI = Known Good Bad Indeterminate Reject Inference = Holdout Sample 10-20% of the population that you hold out from scorecard development with the intention of testing the scorecard with this population to see if Performance Window The amount of time we look forward/back to see if an account has gone bad Observation Window the number of months we want to observe the performance. Good Usually defined as not an exclusion and not defined as bad Bad Defined by business i.e 90 Days Past Due or Impaired i.e insolvent, bankrupt, hardship Indeterminate Sometimes created as a third alternative to good or bad, as the performance window is not long enough to allow the account to go bad. Clean Accounts that has not been delinquent in the last N months, delinquent means DPD > 0 but not > 90. Dirty PSI Population Stability Index. Is used in validating scorecard characteristics. If the PSI changes significantly on a scorecard characteristic, the ability for the scorecard to effectively discriminate good customers from bad customers can be diminished. Score Cut off. The minimum application score to accept an account as a good credit risk. Accept Application that the scorecard rates as an acceptable credit risk Reject Accounts that the scorecard rates as too great a credit risk Override Application that was referred or declines by the Scorecard, that has been changed. Might be because of policy rules. For example a 17 year old applies for a

loan. The loan on paper is accepted by the scorecard, however the policy rule not allowing people 18 or under to apply then overrides the Scorecard Accept to a Scorecard Decline. Good Bad Odds Log Good Bad Odds aka Log Odds Decision Tree Exclusions a set of rules that remove irregular/non-representative accounts from the potential scorecard data. By removing the exclusions we are removing nonrepresentative accounts that would contaminate the scorecard population data. Fine Classing Course Classing Decision Tree Linear Regression Logistic Regression Roll Rates The percentage of accounts that move forward from one debt bucket to another i.e 30 DPD to 60 DPD. FSR Roll Rates Forward, Static, Reverse. Looks at the percentage of accounts, month n month that move further inot debt (Forward), stay in the same debt bucket (static) and people who make more payments (Reserve) Binning Putting variables into stable groups that suffieicnetly discriminate between good and bad. All continuous variable are binned and all category variables are binned. Basel II The Basel 2 accord meant that banks needed in use component for their basel models. Some banks built Basel II definition of default into their App and Beh Scorecards in order to map Scores to PDs.