credit scoring alternatives

In today’s lending environment, having an effective risk rating system in place helps beyond determining a credit union’s loan approval or pricing processes. These systems also impact broader risk management practices, including setting a credit union’s reserve, stress testing, determining risk appetites and strategic planning.

With little prescriptive guidance available, credit unions can customize their risk rating system to fit the unique characteristics of their portfolio, and given the NCUA’s principle-based member business lending rules, credit unions may be putting more resources toward business loans and the complicated risk rating systems they require.

Determining the right risk rating scale – typically from five to nine ratings – is only one step of the process. To determine the thresholds that comprise each rating and the significance of each risk dimension, credit unions should implement a weighting system. In many cases, there are certain risk dimensions that are more closely tied to loan performance and should have more impact on the final rating.

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