University of Portland Decision Modeling and Analitics Discussion

1.2.
You can use Excel to do calculation, but please transfer all your work to the Word
document.
If you write down your answer on paper, you can take a clear picture of your answer and
insert it in the Word document.
Problem 1 (10 points)
A mortgage lender attempted to increase its business by marketing its subprime mortgage. This
mortgage is designed for people with a less-than-perfect credit rating, and the interest rate is
higher to offset the extra risk. In the past year, 20% of these mortgages resulted in foreclosure
as customers defaulted on their loans.
A new screening system has been developed to determine whether to approve customers for the
subprime loans. When the system is applied to a credit application, the system will classify the
application as “Approval for loan” or “Reject for loan.” When this new system was applied to
recent customers who had defaulted on their loans, 90% of these customers were classified as
“Reject.” When this system was applied to recent loan customers who had not defaulted on their
loan payments, 70% of these customers were classified as “Approve for loan.”
(1) (5 Points) If the rating system had classified the applicant in the approve category, what
is the probability that the customer would default on a loan?
(2) (5 Points) If the rating system had classified the applicant in the reject category, what is
the probability that the customer would not default on a loan