As one of the key requirements for meeting Regulation B's definition of a credit scoring system, validations are an essential part of a sound lending, pricing and score card monitoring program. More credit unions are being advised that score card validations should be performed regularly by an unbiased third party. Validations always have been a requirement of Regulation B. However, due to recent economic events there is a more concerted effort by regulatory agencies to ensure validations are performed on a regular basis.
This article discusses why validations are required, which regulations they can satisfy and what else they can do for your credit union.
The main purpose of a validation is to determine how well the score differentiates between good and bad accounts. The more predictive the score, the more confidence you can have in using the score to make approval and pricing decisions. Regular validations provide an ongoing assessment of the model's predictive power and will assist your credit union in determining if the time is right to change scores or to build or redevelop a custom model.
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