Judgmental vs. Credit Scoring Systems in Evaluating Credit Applications - Outcomes on the Micro and Macro Level: Different Inequality Patterns in Getting Credit and Subprime Lending Due to Commodification
Institute of Sociology and Social Policy Corvinus University of Budapest Budapest, Hungary
I argue that as over the time the form of consumer credit becomes more and more money-like the inequality in getting credit becomes a more and more significant issue, just as the income inequality. We present two ideal types of banks? practice in evaluating credit applications which are related to either uncertainty (Russia) or risk (USA) faced by banks (Rona-Tas and Guseva 2001). In situations of uncertainty banks have to rely on judgmental/subjective decision making which results in severe discrimination. When facing risk, credit scoring systems are developed, which grant or deny the loan based on the statistical analysis of the past behavior of individuals similar to the credit applicant. This eliminates the subjectivity of the bank clerk, but it introduces statistical discrimination, which can never be entirely eliminated, although it can be reduced by the positive (full) data credit bureau.
If existing institutions and the perceived stability of the economy make banks to transform uncertainty to risk then the inevitable credit boom decreases the inequality among credit applicants. However, commodification of and selling the loan portfolio becomes possible too. If banks are allowed by regulations to do so then subprime lending will occur because banks can shift their responsibility, so thus transform their own risk to an uncertainty of the whole financial system. On the level of the credit applicant though, instead of being an advantage the access to credit becomes a disadvantage for subprime applicants.