CCP Credit Scoring & Probability of Default 3

Question 1

A bank is building a PD model and must choose between a vintage analysis and a roll-rate analysis. What is the PRIMARY purpose of vintage analysis?

Accepted Answer

To track cohorts of loans originated in the same period and observe cumulative default rates over time

Answer

Vintage analysis groups loans by origination period and tracks their cumulative default performance, revealing seasoning curves and underwriting quality trends.

Question 2

Under Basel III, what is the minimum PD floor that must be applied to retail exposures when using the Internal Ratings-Based (IRB) approach?

Accepted Answer

0.03%

Answer

Basel III sets a minimum PD floor of 0.03% for retail exposures under the IRB approach to avoid unrealistically low capital charges.

Question 3

What is the primary risk of using 'thin file' applicants (those with limited credit history) in scorecard development?

Accepted Answer

The model may be biased because their performance data is sparse or absent

Answer

Thin-file borrowers have insufficient historical data, so models built without accounting for them may perform poorly when applied to this segment.

Question 4

A scorecard developer calculates an Information Value (IV) of 0.48 for a variable. How should this be interpreted?

Accepted Answer

Too strong — the variable is likely leaking target information and should be investigated

Answer

An IV above ~0.3–0.5 is often considered suspiciously high and may indicate target leakage or overfitting, requiring investigation before inclusion.

Question 5

Which of the following credit bureau attributes is typically the STRONGEST predictor of default in a generic scorecard?

Accepted Answer

Worst delinquency in the past 24 months

Answer

Historical delinquency severity (worst status) is consistently found to be the single strongest predictor of future default in credit scoring research.

(CCP) Certified Credit Professional Practice Test

(CCP) Certified Credit Professional Practice Test

CCP Credit Scoring & Probability of Default 3