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

A lender rejects a loan applicant using an automated scoring model. Under typical adverse action and consumer protection requirements, which action is most consistent with the regulatory expectations?

The lender should give the applicant the principal reasons for the denial, drawn from the factors that most influenced the score. Regulators expect individual-level explainability, though not disclosure of proprietary code, and silence or a bare score does not satisfy adverse action requirements.

  1. AProvide the applicant with the principal reasons for the decision, based on the factors that drove the scoreCorrect
  2. BDisclose the full model code and all coefficients to the applicant
  3. CGive no reason, since the model is proprietary
  4. DProvide only the applicant's final score without explanation

Explanation

Adverse action rules require notifying applicants of the principal reasons for denial, which requires the model to be explainable at the individual level. Full code disclosure is not required, and withholding reasons is non-compliant.

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