Different types of models have different life spans -
but none of them last forever. For businesses with stable
customer populations, underwriting models can have a useful life of
3 years or more. In cases where the population is less stable,
model performance can experience significant deterioration in less
than one year. Behavior models
almost always experience performance degradation in less than a
year. Proper validation of your models can insure that
adjustments are made before problems arise.
Several factors can contribute to deterioration in
the performance of a model.
- Population Shift - Most lenders experience some
shifting in customer population over time. This can result
from changes in marketing strategy, increased competition,
tightening of credit standards, and other factors. Such
changes may or may not result in different approval rates and
subsequent performance. The only way to be sure is a
thorough validation process.
- New Product Application - If you have a model
that was developed on a population applying for 10% down payment
car loans, it may or may not work well when applied to a new 0%
down car loan product. Early life validation of such
applications can point towards adjustments that will keep actual
results in line with expectations.
- Self-Obsolescence - This issue is largely
related to behavior models. These models are based on
actual past customer performance, and are used to influence
future customer performance. To the extent that the
attempts are successful, the effort begins to invalidate the
relationships that constitute the model.
VALANTEX provides validation services on either a
one-time or quarterly basis. A one-time validation is
appropriate in cases where a model is being applied to a population
different from the one on which it was built. Quarterly
validation is appropriate when the volume of scoring done with a
model is high, making it critical to identify changes as soon as
VALANTEX for more information, or to request a proposal