Supervising and Regulating the
Use of Credit Repository Data
Raphael W. Bostic
Federal Reserve Board
June 18, 2001
Introduction
• Federal Reserve oversees activities of
institutions that use data at credit
repositories
• Our concerns:
– Data are accurate
– Data are complete
Regulatory Structure
• What data can be kept
– Prohibitions against collecting certain data
– Examples: gender, race, marital status
Regulatory Structure
• What data can be kept
• How long data can be kept
– Allows for opportunity to recover
Regulatory Structure
• What data can be kept
• How long data can be kept
• Who can access the data
– Grounds for obtaining personal information
– Legitimate business purpose required
Regulatory Structure
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What data can be kept
How long data can be kept
Who can access the data
How are disputes handled
– Critical for addressing accuracy concerns
Institutional Structure
• Repositories have an incentive to make their
data complete
– Profit motive: lenders want models that work
best
Institutional Structure
• No regulatory requirement to report credit
information
• A self-enforcement mechanism
– Lenders do not have to report
– Repositories do not have to provide access
Introduction to
Regulation and Supervision
• Credit scoring and safety and soundness
• Credit scoring and fair lending enforcement
Credit Scoring and
Safety and Soundness
• Credit scoring uses
– Rank applicants according to credit quality
– Estimate probability of default
• for individual applicants
• at portfolio level
Credit Scoring and
Safety and Soundness
• If the scoring model does not work, an
institution can face significant, and
unforeseen, risks
• Could potentially results in institutional
stress
Credit Scoring and
Safety and Soundness
• Supervisors must monitor the performance
of scoring models - “Model validation”
• In the US, model validation is done by
specialists at the banking regulatory
agencies
Credit Scoring and
Safety and Soundness
• Validation objectives
– Evaluate model stability, reliability, and
accuracy
– Conduct benchmark analysis/back-testing
Credit Scoring and
Safety and Soundness
• Validation process
– Evaluate sample design
– Evaluate model design
– Assess internal validation procedures
Credit Scoring and Fair Lending
• Ensure that discrimination against protected
classes does not occur
– Overt discrimination
– Disparate treatment
– Disparate impact
Credit Scoring and Fair Lending
• In the US, fair lending oversight is
conducted by examiners of the banking
regulatory agencies
Credit Scoring and Fair Lending
• Model validation
– Was the model developed in accordance with
fair lending laws?
Credit Scoring and
Supervision and Regulation
• Final point
– “I don’t know” is not an acceptable answer!