This blog explores the role credit scores have in the mortgage lending and automated underwriting process. This is particularly important for conforming mortgages or mortgages sold to government-sponsored enterprises (GSEs).
In a previous post, we noted that the majority of consumers who had a 7-year-old delinquency purged from their credit file saw improvements in their FICO® Scores. Now let’s look at whether these consumers’ credit-seeking behavior changed after the delinquency was purged and their score recovered. Were they more likely to apply for credit? Get approved and open new accounts? To assess this, we looked at the proportion of the “delinquency purge” population (those that had a delinquency removed from their credit report between May 2016 and July 2016) that had a new inquiry or opened a new account in the three months following the purge window (August through October 2016). In Figure 1, we compared those values to the same period a year earlier, to avoid capturing seasonal changes in credit habits. The data showed that there was a minor increase in the percentage of consumers that had a... [Read More]
In the depths of the Great Recession, tens of millions of consumers had lapses in meeting their credit obligations. Some seven years down the line, those missed payments are being purged from credit reports in accordance with the Fair Credit Reporting Act, and these consumers may now be looking at a clean (or at least cleaner) slate. To find out how the FICO® Scores of these consumers might be impacted by this negative information being purged, FICO conducted research on a random representative sample of the 28 million US consumers who had a serious delinquency (defined as 90 or more days past due) between 2009 and 2010. This sample was divided into two groups: Those who had a delinquency removed from their credit report between May 2016 and July 2016. We’ll refer to this group, which numbers about 6 million nationally, as the “delinquency purge” population. Those who did not... [Read More]
The National Consumer Assistance Plan (NCAP) is a comprehensive series of initiatives intended to evaluate the accuracy of credit reports, the process of dealing with credit information, and consumer transparency. As a result of NCAP, in July 2017, the three credit reporting agencies (CRAs) are scheduled to make required changes to the criteria used to accept the reporting of a tax lien and/or civil judgment. It is anticipated that civil judgments and some tax liens will be removed from consumer reporting agency (CRA) data when this goes into effect, including previously reported tax liens and/or civil judgments that do not meet the new NCAP-related reporting requirements. All credit scores that utilize CRA data will be impacted, including but not limited to FICO® Scores. FICO recently conducted research on the most widely used FICO® Score versions at all three CRAs to assess the impact of the NCAP-driven removal of public records... [Read More]
There has been much discussion and several studies over the years regarding the potential value of leveraging rental data in assessing consumer credit risk. Which raises the question: Should rental data be widely reported to the three primary consumer credit agencies (CRAs)? If rental data was reported, this might mean some consumers without loans or credit cards would get a FICO® Score, and gain access to more affordable credit. But how many? And how many of these consumers would be considered creditworthy by prospective lenders? In 2015, FICO introduced FICO® Score 9, which scores rental data. This coincided with the first evidence of sufficient positive and negative rental data at the CRAs, a necessary condition for adding this data into the FICO Score algorithm. Great news, right? Well let’s take a deeper look at some of the facts around rental data in the credit report. Not Enough Rental Data in... [Read More]
Access to credit and the path to homeownership are important parts of the American way of life. That’s why it’s critical to understand what can be done to improve financial inclusion — and what won’t work. For months now, the three main US consumer reporting agencies – through their VantageScore business – have been claiming that millions of credit-starved Americans can get access to mortgages through the “innovation” of simply eliminating long-standing and essential minimum credit scoring criteria. This isn’t innovation, and it won’t help borrowers. It’s time to set the record straight. Claim: By loosening the minimum scoring criteria, VantageScore can give millions of currently unscoreable Americans a credit score, making them mortgage-ready. Truth: Scoring sparse and old data may give more Americans a score, but it won’t help those Americans who are actually seeking homeownership credit. Even worse, it locks millions of Americans into unfairly low scores. To... [Read More]
What are the credit behaviors of the millions of US consumers who don’t currently have FICO® Scores? We’ve just published new research on how to safely and responsibly extend credit to these “unscorable” consumers. As part of that study, we took an analytical deep dive to better understand their credit behavior. Since our goal was to help expand credit access, we focused on those within this group who actually apply for credit. These are the consumers for whom extending scoring can make the greatest difference, and we wanted to be able to more accurately assess their credit risk. We found that these consumers differ from the mainstream credit population—and from each other. As a whole, unscorable applicants are more risky. Their overall default rate is almost three times higher than for scorable consumers. Yet risk levels vary considerably within this population. The graphic below shows unscorable applicants separated into risk... [Read More]
According to the latest national distribution of FICO® Scores, US consumer credit quality has continued the slow-and-steady climb we’ve seen over the last few years. As we’ve observed for several years now, more consumers are scoring 800 or above—19.9% vs. 19.6% just six months earlier. And fewer consumers are scoring below 550. In fact, there’s been a clear pattern of decline in this segment since the low point of the economy in late 2009/early 2010. Some of this trend may be a result of the lowest-scoring consumers “dropping out” from traditional credit usage, and by extension no longer having valid FICO® Scores. Still, this decline is encouraging. It indicates that overall more consumers using credit are managing it responsibly enough to not be among the lowest scorers. In addition, the national average FICO® Score is currently at an all-time high since we’ve been tracking this metric, dating back to pre-recessionary... [Read More]
Recently, 31 states announced a joint settlement agreement with the three major credit bureaus regarding changes to the reporting and treatment of consumer credit data, including medical debt. The handling of medical debt is an extremely important issue as the adoption of FICO® Score 9 gains traction. As we explained in a prior blog post, FICO® Score 9 introduces two noteworthy changes in the way the FICO® Score assesses collection information (i.e., information about credit accounts that have been sent to third-party collection agencies), including medical collections. First, FICO® Score 9 disregards all paid collection accounts. Second, FICO® Score 9 differentiates between unpaid medical collections and unpaid non-medical collections. These changes were implemented based on extensive research showing they would improve the score’s predictiveness. Given the tremendous interest in medical debt, it’s worth taking a closer look at these two decisions. Ignoring Paid Collection Accounts As we prepared to develop... [Read More]
I recently had the opportunity to participate in a panel discussion: “What is happening with underwriting and credit standards” during The Future of Housing Finance Conference at George Washington University. One of the topics covered, which garnered a great deal of interest from the audience, was how a more predictive score will allow lenders to safely qualify more consumers for a mortgage. More specifically, the interest was around the analytic advancements within FICO® Score 9. As we’ve shared previously, new features in the score include a multi-faceted modeling approach and a more refined treatment of third-party collections (differentiating between medical and non-medical collections, and ignoring paid collections), which significantly enhance mortgage origination prediction. We recently conducted a research study to illustrate the benefit of using FICO® Score 9 for mortgage originations. We used a swap set analysis that captures both the change in consumer distribution across the FICO® Score range... [Read More]