Welcome to the latest Model Management Monday. This is the eighth in my blog series on model management, each post highlighting a best practice that supports both compliance and improved performance.
Best Practice #7: Defend Decision Strategies
No matter how complex your decision strategies, regulators will expect you to explain and defend them with empirical results. Regulators will want to know how you develop, track and implement your strategies. You must also show the results of your strategies, including the realized losses, gains and exposures arising from your decisions. Most importantly, regulators will want to know how you balance the need to increase profits with the need to contain risk.
Carefully document all your strategy decisions, as well as changes to those strategies. You should document what your subpopulations are, what actions you’ve taken and where cutoff scores are applied. You must also demonstrate that your segments are homogeneous and actionable.
Regulators might also ask you to pull performance and score information on an isolated subpopulation, which they define. They may ask you to pull a sample of your declines or accounts that received other adverse action, in order to make sure you are not engaging in regulatory violations, such as disparate impact or redlining.
Since decision strategies have become increasingly complex, with hundreds or even thousands of nodes, an automated solution is essential to track such strategies, strategy changes and business results. You also want a solution that can simulate various “what-if” scenarios to help you understand the potential impact of strategy changes. These simulations should incorporate business metrics to quantify the impact that strategy changes will have, enabling you to fine-tune decision strategies, balance risk and profits, and optimize business performance.
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. And check our blog next Monday for my next post in this series.