A submodular optimization approach to trustworthy loan approval automation

Abstract

In the field of finance, the underwriting process is an essential step in evaluating every loan application. During this stage, the borrowers' creditworthiness and ability to repay the loan are assessed to ultimately decide whether to approve the loan application. One of the core components of underwriting is credit scoring, in which the probability of default is estimated. As such, there has been significant progress in enhancing the predictive accuracy of credit scoring models through the use of machine learning, but there still exists a need to ultimately construct an approval rule that takes into consideration additional criteria beyond the score itself. This construction process is traditionally done manually to ensure that the approval rule remains interpretable to humans. In this paper, we outline an automated system for optimizing a rule-based system for approving loan applications, which has been deployed at Hyundai Capital Services (HCS). The main challenge lays in creating a high-quality rule base that is simultaneously simple enough to be interpretable by risk analysts as well as customers, since the approval decision should be easily understandable. We addressed this challenge through principled submodular optimization. The deployment of our system has led to a 14% annual growth in the volume of loan services at HCS, while maintaining the target bad rate, and has resulted in the approval of customers who might have otherwise been rejected.