credit risk teams

Abstract: Cold-start credit scoring -- deploying models with scarce labeled data, weak features, or minimal capacity -- is a recurring problem in financial machine learning. When a new lending product launches, labeled default data is scarce, feature pipelines are immature, and models must be deployed with minimal capacity to avoid overfitting. Standard defenses operate on the same limited data; what is needed is a source of external regularization grounded in domain knowledge. We propose Ranking Prior Alignment, a model-agnostic framework that distills external ranking priors (from domain experts, teacher models, or LLMs) into any scoring model via a temperature-scaled KL divergence loss. The framework unifies neural (MIL attention) and tree-based (XGBoost custom objective) architectures through a single formulation: L = L_task + gamma(t) * KL(P_agent || P_model), where gamma(t) follows an exponential decay schedule. The method requires no external model at inference, and its tree-based instantiation tolerates annotation noise up to eta = 0.5. On an industrial dataset of over 1.5M merchants, MIL alignment achieves 7/7 positive evaluation cells at 3K bags (1 ID + 3 OOT + 3 degradation metrics; peak Delta AUC = +0.020 on OOT-1), and XGBoost ablation achieves 9/9 positive metrics at 300 bags. Cross-dataset validation on public Amex shows 5/5 positive folds (avg Delta AUC = +0.041). Four model families (MIL, XGBoost, LightGBM, Logistic Regression) and four teacher architectures show that the framework is both model-agnostic and prior-source-independent. We further observe that alignment gains exhibit an inverse-scaling pattern: benefits grow as data abundance N, model capacity C, and feature quality Q decrease, helping practitioners decide when to invest in prior annotation.

Abstract: Large language models (LLMs) are increasingly used as classifiers, yet they operate as opaque systems whose decisions are difficult to interpret, which complicates their use in regulated domains such as credit scoring or medical diagnosis. We propose an evolutionary framework that iteratively discovers natural language feature definitions (rubrics) for interpretable classification. An LLM generates candidate binary features, evaluates each sample against them, and the resulting vectors can be used to train a transparent classifier such as logistic regression. The feature set evolves over multiple iterations guided by classification errors, per-class activation rates, and feature ablation scores. We evaluate across three benchmarks, including a credit risk dataset representative of regulated domains, comparing single-shot LLM rubrics, evolved rubrics, and direct zero-shot LLM classification. Evolved features improve over single-shot rubrics by +2.9 pp on average and outperform zero-shot LLM classification on two of three tasks, while providing fully auditable decision logic. On the credit risk task, the zero-shot LLM performs at chance (50.7%) with a strong bias toward a single class, whereas evolved features achieve balanced, interpretable predictions. Crucially, this failure is invisible in aggregate accuracy and surfaces only under per-class auditing. Analysis reveals that evolution is most effective when label boundaries cannot be inferred from category names alone or when the LLM lacks reliable domain-specific reasoning.

Abstract: We release PaMIR (Public Arrival-ordered Measurement for Inference in Risk), an open benchmark for credit-default prediction when labels are scarce and arrive late. The field's reference benchmark studies use eight datasets each, only two or four of them public. PaMIR brings together 19 public datasets with binary default labels -- 1.24M loans, firms and card accounts from nine countries -- rebuilt from pinned source snapshots by one leakage-audited recipe and never redistributed; to our knowledge it is the one of its kind as of today. Every model is a single function, scored under a repeated i.i.d. split and a label-delayed stream in which each application is scored on arrival, with AUC reported by label budget; fleet means are withheld unless every dataset is scored. A synthetic-data harness tests generated training rows without letting a generator see held-out rows. This report describes release 0.4.0 of this living benchmark.

Abstract: Algorithmic recourse provides individuals who have received undesirable outcomes from machine learning models with suggestions for minimum-cost improvements to achieve the desired outcome. A central assumption when computing recourse is that the decision rule remains fixed throughout the recourse implementation phase. We challenge this assumption in settings where individuals compete for limited resources. In such settings, widespread recourse implementation can change the acceptance threshold even when the scoring model that is used to evaluate individuals remains the same. This change in acceptance threshold can, in turn, invalidate the original recourse recommendations (i.e., following the recourse may not lead to the desired outcome). To address this problem, we introduce a framework called recourse under competition that jointly optimizes for recommendation recipients and the recommended score target they need to satisfy to balance the recourse cost and post-shift validity among initially rejected individuals. We develop an algorithm based on the Implicit Function Theorem and empirically analyze its performance. Experiments on synthetic and real datasets show that personalized score targets can achieve higher validity, albeit at a higher cost. In contrast, common score targets generally offer favorable cost-validity trade-offs for lower to medium validity values.

Abstract: Verified income is often unavailable in digital loan applications, forcing lenders to rely on reported income and potentially leading to over-lending, overly conservative offers, or rejection of creditworthy applicants. Cross-institutional data-sharing constraints make this problem especially difficult for smaller lenders with limited training data. We introduce FedIncome, a federated learning framework for income estimation that enables institutions to train a shared model without pooling raw borrower records. Using more than one million LendingClub loans partitioned into $50$ state-level clients, we simulate a heterogeneous lending consortium. The best federated model achieves out-of-time $R^2=0.608$, compared with $0.619$ for a pooled centralised benchmark. Small-sample clients obtain an average out-of-time $R^2$ improvement of $3.8$ percentage points relative to the pooled centralised benchmark, while the fitted client-level relationship places the empirical crossover at approximately $4,790$ training observations in this setting. When pooling is infeasible and the relevant alternative is local-only training, federation improves out-of-time performance across all sample-size groups, with the largest gains for data-scarce clients. We also combine federated income estimates with state- and income-specific debt-to-income thresholds. In a retrospective decision analysis, replacing reported income with the federated estimate increases simulated approval rates with only modest changes in observed default rates. FedIncome supports collaborative learning under data-locality constraints with little aggregate loss relative to pooled training and larger gains relative to local-only estimation.

Abstract: Counterfactual (CF) explanations identify changes that alter an input's classification. While existing methods produce realistic and low-cost CFs, they often fail to ensure feasibility, by suggesting non-constructive modifications or incompatible with future changes (e.g., changing an individual's race to secure a job offer). We introduce a refinement of CF explanations that explicitly enforces feasibility. Our approach is the first to efficiently generate CFs that are realistic, low-cost and feasible. We accommodate both hard feasible constraints, specified by domain knowledge users, and soft feasible constraints, inferred automatically via causal inference from the dataset. Our method, Feasible Counterfactual Explanations (FCx), is based on a modified Variational Autoencoder (VAE) optimized with a multi-factor loss function. We measure the cost of a change based on the absolute change in values (proximity) as well as the number of features changed (sparsity) while realism is measured based on the LOF for density estimation, guaranteeing that CFs reside in densely populated regions. Extensive experiments on four public datasets show that our approach matches state-of-the-art performance across multiple metrics while guaranteeing feasibility.