Lenders use a complex set of criteria in order to determine whether to approve home mortgage loan applications. These decisions have traditionally been made by loan officers, after a careful evaluation of loan applications, credit history, work history, and other factors. Now, however, fuzzy logic applications are being used to make this process easier and more efficient for lenders.
Fuzzy Logic Explained
Fuzzy logic enables a computer program to arrive at a decision based on multiple factors with different levels of importance. Rather than "yes" or "no" answers, this type of decision-making software deals with "maybe" and "sometimes". During the decision-making process, this type of artificial intelligence (AI) program evaluates weighted factors to reach a conclusion.
Each factor that applies to the decision made by the fuzzy logic application will have a "weight", or level of importance, assigned to it. The application will compare not only the positive or negative results, but the relative importance of each result. The calculations required to process each decision can be extremely complex. AI applications performing fuzzy logic calculations often use neural networks for processing power.
Using AI in Banking and Loans
Banks and other lending institutions are increasingly making use of AI applications in the loan pre-screening process. Instead of devoting valuable man-hours to the credit application process, lenders can employ AI programs to pre-screen applicants. By providing different levels of importance to each lending criteria, the lender ensures that the application evaluation software is able to correctly process loan applications.
Each lender has different policies, and will apply unique levels of importance to each criteria. A credit score, for example, may carry a different weight depending on the actual number. A very high credit score, or a very low credit score, will affect the credit application more than an average score, in most cases. Even in cases where the credit score is very low, there are mitigating factors which may limit the impact of the score, all of which are part of the fuzzy logic algorithm.
AI Technology Still Requires Oversight
Even with the ability of fuzzy logic applications to employ different standards and take the relative importance of a unique set of circumstances into account, there is still a level of individual interpretation that must be employed when dealing with sensitive financial transactions. Despite advances in AI technology, the loan application process will still require human oversight, at least for the foreseeable future.
References:
Bojadziev, G., Bojadziev, M. (2007). Fuzzy Logic for Business, Finance, and Management, 2nd Edition. World Scientific Publishing Company, Pte. Ltd.
Association for the Advancement of Artificial Intelligence (AAAI)- Fuzzy Logic. Retrieved Jan 24, 2010.
Victoria Nicks - Victoria Nicks has a Master's Degree in IT, and extensive hands-on experience with various types of hardware and software.
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