Model Management Best Practices: Part 1

Welcome to the inaugural Model Management Monday. As I explained in my last post, I'm publishing a series of blog posts, with each post highlighting a best practice that supports the dual goals of compliance and improved model performance. Here's the first in the series.

Best Practice #1: Review Credit Policies Regularly

Regulators will ask about your credit risk policies, since they reflect your organization's broader objectives in terms of risk appetite. That's why it's important to have clearly stated policies and review these regularly.

A thorough review should ask:

• Does each policy serve a purpose? Policies have a tendency to become part of corporate culture. Regular policy reviews ensure you are not retaining a policy when it is no longer useful in the current business environment or overlooking newly emerging requirements.
• Are your policies defensible? Examine your policy requirements closely to determine if they are truly indicative of risk and empirically defensible.
• Are your policies consistent? Policies should be consistent throughout an account lifecycle and across channels, taking into consideration you may need to interact differently with clients in person, over the internet or through a call center.
• Are your policies redundant; do gaps exist? Review policy performance to eliminate redundancies, reduce contradictions, and identify gaps or overlaps. Gaps can result in excessive risk being introduced into your portfolio. In contrast, redundant risk mitigation can limit your opportunity to book good-quality accounts.

Because these policies have a direct bottom-line impact, we recommend reviewing them every six months. In the US, the OCC/Fed guidance requires a review of policies at least annually.

For more details on this and other best practices, download the FICO Insights white paper, "Comply and Compete: Model Management Best Practices" or Martin Butler’s paper on Model Management and Governance.