An Operations-Research Study of the Collection of Defaulted Loans

Statistical decision techniques are developed for loan screening that provide a guide as to how long nonpaying defaulted loans of various types should be pursued by adjusters or collectors before they are completely dropped as uncollectible. A mathematical model yields the optimum pursuit duration and maximum expected net profit for each type of delinquent loan considered and which, if followed, will maximize the over-all net profit of a loan adjustment or collection department. The application of these rules by simulation to a random sample of defaulted loans indicates a potential increase in net profit of approximately 33 per cent.