The Influence of Bureau Scores, Customized Scores, and Judgmental Review on the Bank Underwriting Decision-making Process

In recent years, commercial banks have moved toward automated forms of underwriting and away from the judgmental review of loan applications. This paper employs unique bank loan-level data from a scoring lender to assess the impact of different underwriting approaches on applicant outcomes. To determine whether automated underwriting exhibits a potential “disparate impact” across income strata [highincome versus lowto moderate-income (LMI)], we compare outcomes created under two scoring approaches relative to a “judgmental” underwriting approach. We find that strict application of this custom scoring model leads to higher denial rates for LMI borrowers when compared with both a naive judgmental system and a bureau-scoring approach. We also identify the custom scorecard variables that produce the disparities in applicant denial rates. These results suggest that financial regulators should focus more resources on the evaluation and study of customized scoring models. Future research should exam-