Validating your models when you use overlays

Gone are the days when validating scoring models was a thing you did when you got around to it. Besides that fact that the OCC wants models validated at least once a year, it’s just good business sense to make sure your tools are working as expected. At a minimum, the OCC wants back testing, stress testing, benchmarking and sensitivity analysis, but there is another aspect to validations that needs to be taken into consideration.

Most lenders do not rely exclusively on a scoring model of their decisioning (or at least they shouldn’t). Whether it’s a dual score strategy or attribute overlay, additional underwriting criteria is often used to help refine and optimize decision strategies.

However, those same overlays need to be incorporated into the model validation process so that the results are not misleading. VantageScore Solutions, LLC has just published a concise white paper offering excellent examples of how to make sure your overlay criteria are an integral part of the overall validation process, ensuring your effort here are yielding the right results.

And while on the topic of model validation, next time I’ll review what to do when you have no idea what to test for. Stay tuned!

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