Development and usage of scoring systems in giving mortgages by commercial banks of Latvia

Abstract

Competition among banks is stiff in this field (mortgage loans), where everyone wants to offer clients more favourable terms and conditions, thus gaining the largest market share. However, the credit terms and conditions can vary considerably, given the purpose of credit and the collateral. The world uses different assessment methods for a borrower’s evaluation. Particular attention is paid to the borrower's credibility and additional creditworthiness by collecting, processing and evaluating important information on the credit applicant. This research work is based on theoretical knowledge in economics, legal documents and statistical data analyses to investigate mortgage lending by Latvian commercial banks, the potential risks, the solvency assessment models, including the scoring system (the system’s role in mortgage lending practised by Latvian commercial banks), and to develop proposals for the system improvement. In the paper, the authors give insight into the creditworthiness analysis model – Credit Scoring –, the Latvian mortgage credit market, different loan terms and conditions provided by Latvian commercial banks and lending development impacts and describe the essence of the scoring system and the way how Latvian commercial banks use the system. The new provisions of 2016 in the Consumer Rights Protection Law regarding requesting complete information allow considerably enhancing the loan scoring system of commercial banks in compliance with Directive 2014/17/EU of the European Parliament and of the Council of 4 February on credit agreements for consumers relating to residential immovable property.