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Assessing a Knowledge-based Approach to Commercial Loan Underwriting

by Roger Kumra of Moody's Investors Services,
Roger M. Stein of Moody's Investors Services, and
Ian Assersohn of Moody's Investors Services

October 2000

Abstract: We discuss the challenges in developing decision support tools for commercial underwriting and describe how several different approaches to the underwriting problem have been addressed in practice. We then describe an expert system based approach to credit underwriting that has been in commercial usage for over five years in a variety of financial institutions. The expert system approach addresses many features of the underwriting process that alternative approaches do not. The system is characterized by a functional representation of knowledge and a graph-based inference mechanism. The inference mechanism is unique in its pragmatic approach to the treatment of uncertainty. This approach offers flexibility for modeling various aspects of real world credit decisions not always well treated by traditional approaches. We give examples of how this approach can be and is currently being applied to facilitating underwriting decisions in commercial lending contexts.

JEL Classification: G21, G33.

Published in: Expert Systems with Applications, Vol. 30, No. 3, (April 2006), pp. 507-518.

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