How might Younited Financial optimize its credit scoring algorithm to better assess self-employed applicants while maintaining risk standards?

Introduction

To optimize Younited Financial's credit scoring algorithm for self-employed applicants while maintaining risk standards, we need to delve deep into the unique challenges and opportunities this user segment presents. I'll outline a comprehensive approach to improve our assessment methods, balancing innovation with risk management.

Step 1

Clarifying Questions (5 mins)

• Looking at the product context, I'm thinking about the current performance of our credit scoring for self-employed applicants. Could you share some insights on how our current algorithm performs for this segment compared to traditionally employed applicants?

Why it matters: This helps us understand the gap we're trying to bridge and the magnitude of the problem. Expected answer: Self-employed applicants are 30% more likely to be rejected despite similar risk profiles. Impact on approach: A significant gap would suggest a need for fundamental changes in our assessment criteria.

• Considering user behavior, I'm curious about the typical financial documentation self-employed applicants provide. What are the most common types of financial records we receive from this segment?

Why it matters: This information will help us identify potential new data points to incorporate into our algorithm. Expected answer: Most provide tax returns, bank statements, and profit/loss statements, but often lack traditional pay stubs. Impact on approach: We might need to develop new ways to interpret and verify non-standard financial documentation.

• Thinking about external factors, I'm wondering about regulatory constraints. Are there any specific regulations or compliance issues we need to consider when modifying our credit scoring algorithm for self-employed applicants?

Why it matters: Ensures our solution remains compliant with financial regulations. Expected answer: We must adhere to anti-discrimination laws and maintain transparency in our decision-making process. Impact on approach: We'll need to balance innovation with regulatory compliance, possibly incorporating explainable AI techniques.

• Regarding company alignment, I'd like to understand our risk tolerance. What is our current default rate for self-employed borrowers, and what's our target?

Why it matters: Helps define the boundaries within which we can innovate. Expected answer: Current default rate is 5%, aiming to maintain or reduce this while increasing approval rates. Impact on approach: This will guide how aggressive we can be in adjusting our algorithm.