Feds need to catch up with credit scoring, report says

Federal credit programs need to catch up with their private sector counterparts in the growing field of credit scoring technology, according to a new study by the PricewaterhouseCoopers Endowment for the Business of Government.

Credit scoring, which involves using software models to evaluate a potential borrower's creditworthiness, has come into wide use by private sector lenders because it speeds and simplifies the credit application process. The software quickly evaluates a borrower's credit history and computes the likelihood that a borrower will repay the loan. Lenders receive a creditworthiness judgment in a matter of seconds and borrowers get fast answers on credit applications.

In addition to their speed and simplicity, credit scoring models are viewed as more objective, and thus fairer, assessments than the traditional loan officer model. A loan officer's subjective judgment may influence credit decisions, but computers make decisions based only on facts reported on an application.

PricewaterhouseCoopers commissioned its report, "Credit Scoring and Loan Scoring: Tools for Improved Management of Federal Credit Programs," to understand the impact new lending technologies might have on federal loan programs.

According to the report's author, Thomas H. Stanton, an attorney and fellow at the Johns Hopkins University Center for the Study of American Government, credit scoring technology could be a boon for federal loan programs.

In addition to their efficiency, scoring software can be used to create early-warning systems that detect a drop in the creditworthiness of an agency's loan portfolio. Credit managers can keep track of correlations between credit scores and successful methods of intervention to kep people from defaulting on loans.

There are many more useful applications of credit scoring technologies in the federal sector that can help federal credit agencies serve their missions better, the report said. But transferring private sector techniques directly to the public sector will not be an easy task.

Market forces and government regulations present roadblocks to directly transferring the scoring technique to the federal sector. "Ultimately, the application of new technologies may require some federal credit agencies to develop more flexible organizational structures and programs if they are to continue to serve their public purpose," the report said.

Stanton recommended the Office of Management and Budget take the lead in helping agencies share credit scoring approaches and develop plans to implement the technology. Agencies will need to learn from private firms, but not emulate them directly, because the groups federal programs make loans to act differently from the general population the private sector deals with, the report said.

The report is available online at endowment.pwcglobal.com.