Question & Answer

Question: I have heard that there is a guideline of 10% overrides for lenders that use credit scoring to make or support a credit decision. Word is that if the lender overrides the credit score by more than 10%, examiners will look at the practice for possible discrimination. Is this true? Where is it written? Does it make any difference if the decision is totally based on the credit score or if the score is used as one of several factors?

Answer: You are more or less right. The word on the street is that examiners, at least at the OCC, are using this 10% override guideline. It is not written in the examination procedures, however, so don't consider this a safe rule to follow. It could change with the speed of sound - well, almost.

As a practical matter, if you have more than a 10% override, either to approve or to deny, you aren't really following the credit scoring system. This is the time to ask questions about why the overrides are occurring. You should audit to determine whether there are any patterns to the overrides and whether those patterns may have an impact on a prohibited basis.

Your audit should look at the decisions made, and where they were made - which branch - and by whom the overrides were made. Look particularly for patterns in branches or patterns that may be the result of a single loan officer who believes that he or she knows better than the system. We believe that you should use a 5% override pattern - or even less - as a rule of thumb to trigger the audit. This helps you to identify unhealthy trends before they create large problems in your portfolio.

Another thing to take into account when evaluating credit scoring overrides is loans that have gone or are going bad. If your collection portfolio contains a disproportionate number of loans that the credit scoring system denied but the loan officer made anyway, you have concrete evidence that the system works (and the loan officer doesn't).

Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 15, 12/99