1. SCORING MODELS – PRO’S, CON’S, AND LEGAL CONSIDERATIONS
CRAIG COMBS
KYR FINANCIAL LLC
SCOTT E. BLAKELEY
VIRGINIA SODERMAN,
Ventura Foods, LLC
December 11, 2014

2. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
BIG PICTURE
What are you trying to accomplish?
Define the purpose & function of the model.
How many accounts do you have?
Can your credit department handle individual analysis?
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

3. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
What are you trying to accomplish?
Payment predictability/collectability
Ultimate solvency/insolvency
Training and guiding new professionals
Identify traits of Desirable Trading Partners
Identify traits of Undesirable Trading Partners!
Can create a database for flexible reporting
Automated versions save the time of professionals
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

4. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
Creates consistency in the data gathering and decision making process.
Review schedules are improved as a result of time savings
When a standard such as a model is used, it is relatively easy to modify the model to either ease or restrict credit granting depending on the company’s needs.
Multiple data points from multiple sources: both internal & external can be integrated for use.
For companies who are required to be Sarbanes-Oxley compliant, scoring provides a sound basis for consistent processes.
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

5. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
Can create an undesirable dependency.
Can lead to lack of judgment utilization.
Scoring is sometimes seen as a threat, with the fear being that the “art” of credit granting will be lost.
Scoring can lead to irrational business decisions, particularly for larger dollar relationships.
“Garbage in…Garbage out” theory.
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

6. CREDIT PROFESSIONAL/ANALYST CONSIDERATIONS
How widespread is the scoring?
Set parameters for use
Scoring should set the foundation for decision making.
Flexibility to utilize the judgment of the Credit Professional
Test the model and tweak if necessary!
How often is the model updated?
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

7. CREDIT PROFESSIONAL/ANALYST CONSIDERATIONS
Allows comparison of customers with similar traits
Manage Risk by Segment or Characteristics
In a shared services environment, can allow for varying criteria by segment or channel
Ability to adjust risk by adjusting model components
Interval vs. External Data Inputs
Resistance from some Credit Professionals
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

8. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
DEPLOYMENT
External Score
D&B, PredictiveMetrics, Cortera, KYR Financial, etc.
Understand the rationale for the external score
What are the data inputs?
Internal Score
Financial Inputs (EBITDA, Leverage, Interest Coverage, etc.)
Assign weights to each input
How much analyst flexibility is given?
Combination
Use external vendor score as one component of an overall score
Determine internal financial inputs
Decide on weight of external score vs. internal inputs
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

9. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
Example
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

10. Example ACCOUNT INFORMATION RISK SCORE AND RISK ASSESSMENT
Date/Credit Manager
8/15
2012
67098
Type of Business
Foodservice
Company Name
Curly Anything
Annual Sales
$150,000,000
Address
Big Al's Food Store
Years in Busines 17
City/State/Zip Code
Chicago Il
Year Started
1995
RISK SCORE AND RISK ASSESSMENT
Category
Score %
Score Adjustment
Recommended Credit Line
Credit Score 80 0%
+/-10%
Volume
$75,750
With Credit Manager Adj
+/- 10%
Credit Manager
Credit Score Risk Level
Credit Limit Adjustment 1%
Total Credit Score Adj
Low Risk
RISK SCORING ANALYSIS AND REVIEW

11. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
Anti-trust issues: Sherman Act, Robinson Patman Act
Gathering information: Fair Credit Reporting Act and Privacy Laws
Objective credit decisions: Equal Credit Opportunity Act
Documenting the policy: E-Credit Laws and Document Retention
Mitigating Credit risk through credit enhancements
Privacy Laws
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

12. Antitrust Laws and the Credit Department
The Sherman Act of 1890
Agreements between competitors to fix credit terms violates the Sherman Act
Refuse to extend credit or black list customer
Sharing Customer Payment Information with Industry Group
Setting Price and Credit Terms
Price discrimination applies to credit department as terms of sale are a part of pricing
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

13. Antitrust Laws and the Credit Department
Robinson-Patman Act: Price Discrimination and Restraint of Trade
Prevent discriminatory pricing, including credit terms, between like classes of customers
Discounts offered to one customer offered to all
Defenses
Meeting Competition
Volume Discounts
Setting terms and trade concessions
Quantity volume discounts
Promotional allowances
Prompt pay discounts
Shipping discounts
Credit Term Changes and Price Changes
Credit Hold
Terminating Credit
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

14. Antitrust Laws and the Credit Department
Libel and Slander
Statements that harm a reputation
When exchanging information, must be careful to avoid damaging phrases
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

15. Equal Credit Opportunity Act
To ensure that credit grantors do not discriminate
Notification of Adverse Action
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

16. The Fair Credit Reporting Act
Regulates the use of the individual credit reports and credit information
What is a credit report?
Notification if Credit is Declined Based Upon Credit Report
Penalties for Violating FCRA
FCRA Authorization Contained in Personal Guarantee
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

17. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
Reducing Credit Risk
Letter of Credit
Certificate of Deposit
Guarantee
Purchase Money Security Interest
Junior Security Interest
Consignment
Credit Insurance
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

18. E-Credit Laws and Document Retention
Digital Signature Act
Digital Signature has same force as ink and paper signature
policy
Document Retention Policy
Litigation Hold
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

19. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
Privacy Laws
Information covered
Compliance
Encryption
Policy and Notices
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

20. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS
SUMMARY
Scoring Models can provide a valuable function in today’s credit environment when utilized appropriately
Effective Models support analytics and decision making
New opportunities can be highlighted
Consistency is critical
Legal considerations must be adhered to
CRIAG COMBS
KYR Financial LLC.
(805)
SCOTT E. BLAKELEY
VIRGINIA SODERMAN,
Ventura Foods, LLC
(714)
SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS