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case Studies
Cafe Cerebral
 
COLLATERAL VALUE PREDICTION
Background
  • Client finances billions of loans funded annually, processing millions applications
  • Existing risk model used a single severity factor ($ charge-off/unit % charge-off rate) across the population
  • However, actual behavior indicated >80% variation in severity factor across all 10 segments of decision
Objective
  • Assess the potential of building a model in the approval process to predict the collateral value of an application and identify segment level Severity factor for more accurate $ loss rate prediction
 
Data Preparation
  • Acquire APD, ACD, Performance, Liquidation & VIN tables
  • Investigate Data mapping, coverage
  • Data Dictionary Generation: Fill rate and overall quality check
  • Population selection based on vintage and data availability
  • Align independent variables by data source
  • Master dataset creation
Profiling
  • Dependent variable: Total Value recovered from the default asset after repossession
  • Identify existing segmentation based on risk category (PREM, STD, BK) and LTV groups
Variable Selection
  • Univariate Selection
  • Bivariate Selection
  • Business Logic
  • Missing Generation
  • Missing Imputation
  • Outlier Treatment
  • Derived Variable Creation
Modeling
  • Selection bias correction
    • Reject inference using inverse miles ratio
  • Recovery value estimation
    • Linear regression
    • Score collateral value
  • Charge-off estimation
    • Logistic regression
    • Score charge-off probability
  • Simulation
    • Variable importance
Validation
  • Recovery value model
    • Actual vs. predicted
  • Charge-off model
    • Actual vs. predicted bad rages
    • Lorenz curves
 
  • By using different severity factors for various section of the population, the client enabled ...
    • ... better decisioning and lower credit risk
    • ... improved market place product pricing
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