5 Model Classification Blind Spots to Watch in 2026

by Stefani Wendel 6 min read March 20, 2026

Model risk management meeting

Model inventories are rapidly expanding. AI-enabled tools are entering workflows that were once deterministic and decisioning environments are more interconnected than ever. At the same time, regulatory scrutiny around model risk management continues to intensify.

In many institutions, classification determines validation depth, monitoring intensity, and escalation pathways while informing board reporting. If classification is wrong, every downstream control is misaligned. And, in 2026, model classification is no longer just about assigning a tier, but rather about understanding data lineage, use case evolution, interdependencies, and governance accountability in a decentralized, AI-driven environment.

We recently spoke with Mark Longman, Director of Analytics and Regulatory Technology, and here are some of his thoughts around five blind spots risk and compliance leaders should consider addressing now.

1. The “Set It and Forget It” Mentality

The Blind Spot

Model classification frameworks are often designed during a regulatory remediation effort or inventory modernization initiative. Once documented and approved, they can remain largely unchanged for years. However, model risk management is an ongoing process.

“There’s really no sort of one and done when it comes to model risk management,” said Longman.

Why It Matters

Classification is not merely descriptive, it’s prescriptive. It drives the depth of validation, the frequency of monitoring, the intensity of governance oversight and the level of senior management visibility.

As Longman notes, data fragmentation is compounding the challenge. “There’s data everywhere – internal, cloud, even shadow IT – and it’s tough to get a clear view into the inputs into the models,” he said.

When inputs are unclear, tiering becomes inherently subjective and if classification frameworks are not reviewed regularly, governance intensity can become misaligned with real exposure. Therefore, static classification is a growing risk, especially in a world of rapidly expanding AI use cases.

In a supervisory environment that continues to scrutinize model definitions, particularly as AI tools proliferate, a dynamic, periodically refreshed classification process can demonstrate institutional vigilance.

2. Assuming Third-Party Models Reduce Governance Accountability

The Blind Spot

There is often an implicit belief that vendor-provided models carry less governance burden because they were developed externally.

Why It Matters

Vendor provided models continue to grow, particularly in AI-driven solutions, but supervisory expectations remain firm.

“Third-party models do not diminish the responsibility of the institution for its governance and oversight of the model – whether it’s monitoring, ongoing validation, just evaluating model drift” Longman said. “The board and senior managers are responsible to make sure that these models are performing as expected and that includes third-party models.”

Regulators consistently emphasize that institutions remain responsible for the outcomes produced by models used in their decisioning environments, regardless of origin. If a vendor model influences credit approvals, pricing, fraud decisions, or capital calculations, it directly affects customers, financial performance and compliance exposure.

Treating third-party models as inherently lower risk can also distort internal tiering frameworks. When vendor models are under-classified, validation depth and monitoring rigor may be insufficient relative to their true impact.

3. Limited Situational Awareness of Model Interdependencies

The Blind Spot

Modern decisioning environments are interconnected ecosystems. Forecasting models may influence reserve calculations. Marketing models may be repurposed across product lines. Data transformations may feed multiple downstream models simultaneously.

Why It Matters

Risk often flows across interdependencies. When upstream models degrade in performance or introduce bias, downstream models inherit that exposure. If multiple material decisions depend on the same data transformation or feature engineering process, concentration risk emerges. Without visibility into these dependencies, tiering assessments may underestimate cumulative risk, and monitoring frameworks may fail to detect systemic vulnerabilities.

“There has to be a holistic view of what models are being used for – and really somebody to ensure there’s not that overlap across models,” Longman said.

Supervisors are increasingly interested in understanding how model risk propagates through business processes. When institutions cannot articulate how models interact, it raises broader concerns about situational awareness and control effectiveness. Therefore, capturing interdependencies within the classification framework enhances more than documentation. It enables more accurate tiering, more targeted monitoring and more informed governance oversight.

4. Excluding Models Without Defensible Rationale

The Blind Spot

Gray-area tools frequently sit outside formal inventories: rule-based engines, spreadsheet models, scenario calculators, heuristic decision aids, or emerging AI tools used for analysis and summarization. These tools may not neatly fit legacy definitions of a “model,” and so they are sometimes excluded without robust documentation.

Why It Matters

Regulatory definitions of “model” have broadened over time. What creates risk is the absence of defensible reasoning and documentation.

Longman describes the risk clearly:

“Some [teams] are deploying AI solutions that are sort of unbeknownst to the model risk management community – and almost creating what you might think of as a shadow model inventory.”

Without visibility, institutions cannot confidently characterize use, trace inputs, or assign appropriate tiers, according to Longman. It also undermines the credibility of the official inventory during examinations.

A well-governed program can articulate why certain tools fall outside model risk management scope, referencing documented criteria aligned with regulatory guidance. Without that evidence, exclusions can appear arbitrary, suggesting gaps in oversight.

5. Inconsistent or Subjective Classification Frameworks

The Blind Spot
As inventories scale and governance teams expand, classification decisions are often distributed across reviewers. Over time, discrepancies can emerge.

Why It Matters

Inconsistency undermines both risk management and regulatory confidence. If two models with comparable use cases and impact profiles are assigned different tiers without clear justification, it signals that the framework is not being applied uniformly. AI adds even more complexity.

When it comes to emerging AI model governance versus traditional model governance, there’s a lot to unpack, says Longman: “The AI models themselves are a lot more complicated than your traditional logistic or multiple regression models. The data, the prompting, you need to monitor the prompts that the LLMs for example are responding to and you need to make sure you can have what you may think of as prompt drift,” Longman said.

As frameworks evolve, particularly to incorporate AI, automation, and new regulatory interpretations, institutions must ensure that changes are cascaded across the entire inventory. Partial updates or selective reclassification introduce fragmentation.

Longman recommends formalizing classification through a structured decision tree embedded in policy to ensure consistent outcomes across business units. Beyond clear documentation, a strong classification program is applied consistently, measured objectively, and periodically reassessed across the full portfolio.

BONUS – 6. Elevating Classification with Data-Level Visibility

Some institutions are extending classification discipline beyond models to the data layer itself. Longman describes organizations that maintain not only a model inventory, but a data inventory, mapping variables to the models they influence.

This approach allows institutions to quickly assess downstream effects when operational or environmental changes occur including system updates or even natural disasters affecting payment behavior.

In an AI-driven environment, traceability may become a competitive differentiator.

Conclusion

Model classification is foundational. It determines how risk is measured, monitored, escalated, and reported. In a rapidly evolving regulatory and technological environment, it cannot remain static.

Institutions that invest now in transparency, consistency, and data-level visibility will not only reduce supervisory friction – they will build a governance framework capable of supporting the next generation of AI-enabled decisioning.

Related Posts

How Terrace Finance Uses NeuroID to Respond to Fraud Faster and Smarter

Learn how Terrace Finance used NeuroID behavioral analytics to detect fraud faster, respond to attacks, and strengthen risk management.

Published: June 29, 2026 by Scarlet.Nickel@experian.com
Ask the Expert: A Closer Look at Modern Lending with Jeff Hops and Erin Haselkorn

In this first episode of Ask the Expert, Experian's Jeff Hops, Senior Director of Data Platform and Product, and Erin Haselkorn, Senior Director of Analyst Relations, explore how broader data and new signals can help lenders better understand today’s consumers, while maintaining responsible decisioning. Lending is changing  Interest rates, regulation, embedded finance and AI are reshaping the lending landscape. Consumer behavior is evolving just as quickly. But the core job hasn’t changed. Lenders are still making decisions about people they don’t fully know, and that makes data more important than ever. "There are periods where nothing changes, and periods where it seems like everything changes. We’re in the latter … but the core premise hasn’t changed. You’re still trying to lend to somebody you don’t know."Jeff Hops, Senior Director of Data Platform and Product To make those decisions with confidence, lenders need a strong foundation of identity, history and reliable signals. In a period of rapid change, the quality and completeness of that data become even more critical. A more complex view of today’s consumer What has changed is the consumer. Traditional credit data is foundational but can be further enhanced with visibility on how people earn, manage and move money. Income may come from multiple sources, and financial activity often spans bank accounts, applications (apps) and digital channels. Cash flow data, for example, can provide a clearer view of what’s actually coming into a consumer’s account, beyond what traditional records may show.These additional signals can help lenders better understand: Income variability across multiple earning sources Current financial behavior through cash flow activity Digital and identity-linked activity across channels These signals don’t replace traditional data; they expand it. The result is a more complete and current view of the consumer. From exploration to real-world application The conversation around broader data signals has moved beyond theory. Lenders are no longer just asking whether these signals are useful. They’re asking where, how and under what governance they can be applied across the lending lifecycle. Lenders are actively researching, testing and implementing new data sources across the lending lifecycle. What was once experimental is now operational. Institutions are progressing through a clear path: Research Understanding available signals and use cases Testing Evaluating performance in controlled environments Implementation Applying insights in production Today, alternative data is being used in areas like analytics, channel scoring and decisioning, often within governed environments that allow for safe testing and validation. AI may accelerate this shift by helping institutions identify patterns at scale, but its value depends on the strength of the underlying data: quality, governance, context and clear business use cases. More signal, more responsibility As data availability expands, lenders have access to more granular insights than ever before. That creates opportunity, but also responsibility. The institutions that lead won’t be the ones that use the most data. They’ll be the ones that know which signals to use, how to validate them and how to apply them in ways that are fair, explainable and aligned to consumer outcomes. “Institutions can unlock more granular and powerful decisions, but they have to do it responsibly.”Erin Haselkorn, Senior Director, Analyst Relations The future of lending will be shaped not just by how much data is available, but by how thoughtfully it’s applied. Keeping the consumer at the center of decisioning is essential to building trust and long-term success. Explore alternative data with us A more complete understanding of today’s consumers starts with better data. We help lenders responsibly incorporate broader data signals and advanced analytics into decisioning strategies, enhancing visibility into today’s consumers while strengthening risk assessment and expanding access to credit. Let’s work together to build more confident, more responsible lending decisions. Learn more Contact us About our experts Jeff Hops Senior Director, Data Platform and Product, Experian Jeff Hops is a Senior Director in Experian’s Financial Services and Data business with over eight years of experience driving innovation in credit and data solutions. He has led product development for Experian’s Credit Report and played a key role in launching Ascend Identity Platform™, a leading identity resolution platform. Erin Haselkorn Senior Director, Analyst Relations, Experian Erin Haselkorn is responsible for analyst relations for Experian. She has developed an understanding of key marketing trends across a broad range of verticals. Her market research around data strategy, AI, fraud, identity and data management, paired with her broad Experian product knowledge, gives her a unique understanding of business automation and data trends. Erin is a frequent spokesperson and guest blogger.

Published: June 22, 2026 by Julie.JLee@experian.com
How Consumer Vehicle Choices Are Shaping Automotive Loan Trends

Conversations about rising auto loan balances and higher monthly payments has often centered around increasing vehicle prices and elevated interest rates; and while those factors have undoubtedly played a role, another important piece of the puzzle is the type of vehicles consumers are choosing to purchase. According to Experian’s Automotive Consumer Trends Report: Q1 2026, consumers are continuing to opt for SUVs over other vehicle types, a trend that may be contributing to higher average loan amounts and monthly payments. SUVs accounted for 63.5% of all new retail vehicle registrations over the last 12 months, up from 62.8% a year ago. Additionally, more than 117 million SUVs were in operation across the United States in the first quarter of 2026, making up 42.2% of the market share. At the same time, traditional passenger cars continue to fall in share, coming in at 16.5%, a decrease from 18.4% last year. As consumers increasingly gravitate towards the larger vehicle segment, it reflects the ongoing desire for versatility, cargo capacity, and family-friendly functionality. Electrification’s growing role in consumer purchasing behavior Interestingly, electrified SUVs continue to gain traction, representing 27.7% of all new SUV registrations, these vehicles include battery-electric, hybrids, plug-in hybrids, and other alternative fuel types. Diving a bit deeper, the Tesla Model Y was the market share leader for new, retail electrified SUV registrations in the last 12 months, coming in at 15.8%. Rounding out the top five were Honda CR-V (9.6%), Toyota RAV4 (7.2%), Chevrolet Trax (7.2%), and Toyota Grand Highlander (3.4%). As model availability and familiarity with the electrification segment grows, the broader adoption of these vehicles are playing an increasingly important role in vehicle pricing and overall consumer demand. While average loan amounts and monthly payments are being driven by a combination of factors such as financing costs and consumer purchasing behavior, data in Q1 2026 demonstrates the continued interest in SUVs. This suggests that the industry’s shift toward larger vehicles is likely playing a meaningful role in today’s financing environment. To learn more about SUV insights, view the full Automotive Consumer Trends Report: Q1 2026 presentation.

Published: June 17, 2026 by Kirsten Von Busch