Character Scoring Enhancing Credit Scoring

Quick test, true or false: “I’m confident that I’ll be successful in most things I try.”  Be careful – your answer could affect whether the banks of the future give you a loan.  An innovative research group that helps finance entrepreneurs in emerging markets has come up with a 200-question personality test to gauge creditworthiness – and the approach could gain wide acceptance.

Entrepreneurial Finance Lab, which grew out of research at Harvard University, provides the test to lenders serving small entrepreneurs in 20 emerging markets.  Since the borrowers typically lack traditional credit records EFL focuses on “psychometrics” – measures of character, intelligence, and attitudes.  On the question about your confidence of success, an answer of “true” could be a red flag if you’re young, suggesting naiveté about risk.  For older respondents, “true” may well reflect a track record.  But no single question among the 200 holds the key.  Instead, EFL compares your answers in relation with one another via a complex algorithm, ultimately producing one score.

The model is every bit as effective as a loan officer in determining a borrower’s ability and willingness to pay, says Timothy Ogden, a research leader a New York University.  He thinks the model is “scalable” – capable, for instance, of helping a mortgage lender determine if a borrower would keep paying if their equity values were to plummet.  Fans say it could be a useful addition to traditional credit scores.  Little wonder that big banks Wells Fargo and Capital One already have approached EFL about using the model in the United States.  Once considering the overleveraged position of Canadian consumers, and therefore the growing risk exposure of Canadian financial institutions, don’t be alarmed to see “psychometrics” finding its way north of the boarder at a Canadian financial institution in your neighborhood.