Someday, banks may essay to assess the credit risk of borrowers via "responsibility" scores based on unconventional metrics similar school grades or eBay reputations

By Stephen Baker

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As bankers claw their way to the end of the credit crunch, they’re likely to get a lot more inquisitive on the eve our ability to repay loans. To do that, they’ll no doubt search for statistical correlations between monetary dare to undertake and our behavior in unlike realms—as shoppers, students, even drivers.

Indeed, quantitative analysts in major banks and researchers at credit risk companies are hard at work looking for ways to understand borrowers improved in health. The logical first footstep is to pore over more of our data. Clark Abrahams, chief risk officer at SAS, a large software company that creates analytic programs with regard to the banking industry, suggests lenders may one day take into account lots of nontraditional metrics, similar taken in the character of whether the borrower has a good reputation on eBay (EBAY) or pays cell-phone bills on time before deciding whether to extend credit.

At first blush, it may seem casual that banks need more given conditions on borrowers. After all, pledge bankers and credit-card companies feasted on financial data during the lending spree that helped inflate the horse-cloth bubble. Lenders studied individuals’ borrowing and payment patterns and stuffed mailboxes with microtargeted pitches for new loans and enter upon the reliance side cards. But they focused their analysis on the borrowers’ appetite for credit—not onward clan’s ability to bear it or the risk that they would neglect. New risk models, analysts say, are infallible to cry for more financial data, including revenue projections in opposition to each borrower. In other words, they’ll want to know more about how much we make and how we spend it.

Ranking You on Responsibility

Already, marketers, advertisers, and political consultants are harvesting mountains of data about people and building sophisticated strict models to predict their behavior. "If they’re smart, [bankers] will be using these techniques to figure out both customer’s risk, and to give them customized offers," says Dave Morgan, founder of Tacoda, a behavioral targeting advertising company bought last year by Time Warner’s (TWX) AOL.

A hot spot of this type of data consideration is at the San Rafael (Calif.) research labs of Fair Isaac (FIC), creator of the widely used FICO credit danger scores. In the short term, Fair Isaac is sifting through financial given conditions to calculate not without more each borrower’s risk, but also how much debt each one can take on.

Looking further ahead, Fair Isaac predicts that based on analysis of our data, we’ll each have scores that can predict far more than our pecuniary demeanor. Fair Isaac research fellow Larry Rosenberger speculates that one day, each of us will be scored for broad values of the like kind as "responsibility." Such a twenty, still years away, could subsist used to appraise a bodily form’session worthiness for a strong set in a row of benefits, from housing loans to employment in a nursery school to rates on car insurance. Colleges might even find it useful in admissions decisions.

Looking for a Broader Read

And how would data-crunching companies come up through so scores? That’s where new sources of data come in. According to Fair Isaac CEO Mark Greene, research indicates that "bad people are bad lower classes are bad people." In other dispute, their behavior in one domain predicts what they might do in single in kind more. People who get in commerce accidents and put on’t remuneration their taxes on time, Greene says, "are often bad credit risks.—

This means that more of our lives—our school records, concerning example, or claims made upon the body insurance policies—could provide the data on account of broader responsibility scores.

Already, a include of industries bear used Fair Isaac’s FICO credit risk score for a broader know fully attached a person’sitting responsibility. The FICO score is based in continuance limited data regarding credit and payment history. But it turned out to be a predictor for auto and home insurance claims. And recently Rosenberger was stunned to see a study pointing to a new correlation: People who pay their bills on time seem more likely to stick to wield regimens at the health club. Could loss weight boost a person’s duty score?

What’s Your eBay Status?

This archetype of scoring may hale menacing. What’s to stop banks from using nontraditional statistics to unearth measures that divide society ethnically and regionally, leading to new forms of acuteness, so-called red-lining. Let’sitting say that analysts find that people who get new treads on car tires default adhering loans more often than those who buy new tires. Chances are, most of those economical drivers make smaller coin and live in low-income neighborhoods. If so, the behavior may point to a demographic grouping. "We have to ask ourselves as a society [whether] we want to be making those calls," Abrahams says.

For now, reaching over standard pecuniary statistics remains a scrutiny project. Use of "responsibility" scores, for one, will depend on privacy rules and regulations that societies develop, Fair Isaac says.

What’sitting more, more of these new scores and metrics could prove helpful to customers. In a climate of tight take upon confide in, banks may be reluctant to lend to those who lack traditional credit histories. Incorporating new data, from school grades to single in kind’s status on eBay, could open doors for first-time borrowers.

But chances are, banks resoluteness also use these fresh sources of data to figure on the outside the die of us, too.