7. Underwriting and Credit Scoring

In the previous three chapters, we deal with credit risk modeling for loans and portfolios already in house. For financial institutions in the origination business, there is a critical credit risk at the door when doing underwriting, since the quality of the loans approved and funded will decide those risks we discussed in the previous chapters or the price if these loans are sold. The credit risk in underwriting is traditionally treated independently from the credit risks in the common credit risk management frameworks we presented early given that not all financial institutions carry origination businesses for products in their portfolios and credit risk embedded in underwriting is more considered business strategic risk or market risk from the underwriting line of businesses. Nevertheless, such risks are measured by credit events, and a similar credit risk modeling technique called credit scoring is dominantly used.