PrepTest 149, Section 1, Question 19

What we’re looking for

Working the answers

• A
  Correct

  Lenders may let the impressive credit score distract them from other warning signs. Imagine a borrower with an excellent payment history but income that has become highly irregular. If the lender overlooks that instability because of the score, the loan can still be risky.

  This is a different route from my bigger-loan prediction, but it explains the group difference. Borrowers with lower scores receive more attention to other risk factors, while some risky borrowers with the highest scores get through that screening. A good score can be a favorable sign without making every loan to its holder safe.

• B

  Imperfect data could help explain why a credit score isn't infallible. But we need to explain the higher default proportion specifically among the highest-scoring mortgage borrowers. B doesn't say the errors disproportionately inflate those borrowers' scores or otherwise account for that difference. General imperfection leaves the comparison unexplained.

• C

  Past repayment history helps explain why we might expect a high score to indicate lower risk. It doesn't explain why the highest-scoring mortgage borrowers instead default more often. C gives background for the expectation that makes the result puzzling.

• D

  This resembles the idea that size makes a loan risky, but it compares a person's mortgage with that person's other loans. Our puzzle compares mortgage borrowers with different credit scores. Even if mortgages are large for nearly everyone, we still need to know why the highest-scoring group defaults at a higher rate.

• E

  How many borrowers fall into each score group doesn't establish what proportion of each group defaults. A small group can have a high default rate, and a large group can have a low one. Knowing that most borrowers fall between the extremes leaves the difference in default rates unexplained.