Skip to content

FRM Part II · FRM Exam Part II · Credit Scoring and Retail Credit Risk Management

A bank must send adverse action notices to declined applicants of its automated scoring system. Which approach best satisfies the regulatory expectation of explainability for such notices?

The bank should report the principal factors that most lowered the applicant's score, such as recent delinquencies or high utilization. Regulators expect specific, meaningful reasons for a decline, not a generic statement, not the full model, and not merely a score comparison.

  1. AState that the application was declined by the proprietary model without further detail
  2. BReport the principal factors that most reduced the applicant's score, such as recent delinquencies or high utilizationCorrect
  3. CDisclose the full scorecard coefficients and cutoff to every applicant
  4. DProvide only the applicant's final score and the population average score

Explanation

Adverse action notices are expected to give the main reasons for the decline, typically the top factors that lowered the score. A generic statement is insufficient, and disclosing the entire model is not required. A score alone does not identify reasons.

Did you get it right without looking?

One question tells you little. A timed set on Credit Scoring and Retail Credit Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Credit Scoring and Retail Credit Risk ManagementFree diagnostic mock

More Credit Scoring and Retail Credit Risk Management questions