You may have heard that alternative data holds great potential for expanding access to credit to more consumers to help them achieve their financial goals. Indeed, more data can enable credit score providers like FICO to provide a more complete snapshot of consumers’ credit behavior and potential risk. While FICO has been the leader in developing innovative ways to incorporate new and regulatory compliant alternative data into credit scores, there are still barriers to fully unlocking the potential of alternative data. Due to the confusion around this issue, it’s important to be clear about what constitutes alternative data. In our view, for data to be considered “alternative data”, it means that the data is not part of the traditional consumer credit files maintained by the three largest credit bureaus (Equifax, Experian and TransUnion). The credit bureaus do maintain utility, cell phone and/or rental data and the FICO® Score has used... [Read More]
I had the chance to attend the Structured Finance Industry Group’s annual conference in Las Vegas, where SFIG’s members, including securities investors in a range of industries — from mortgage to auto to commercial lending — gather to discuss the latest and greatest in securitization. During the conference, FICO also took the opportunity to survey these investors about how they use credit scores to evaluate loans, what factors they want to see included in scores, and what makes them trust one score over another. Here’s what I learned: The FICO Score is the most trusted metric for loan quality. Nearly half of respondents (45 percent) said the FICO® Score was the most useful criteria in evaluating the quality of loans for secondary market investments, the most of any criteria for analyzing a loan. Loan-to-Value Ratio (34 percent) was second, and Debt-to-Income Ratio (10 percent) was third. FICO has been the... [Read More]
What is a financial goal that you would like to achieve? Attendees at FICO’s recent Score A Better Future events in St. Louis and Atlanta told us their goals range from starting a business, to owning a home to saving for retirement, to paying down debt. In fact, for many, these goals were key motivators for attending the events. In speaking further with the attendees, we found that many could quickly and specifically articulate their long-term financial dreams, yet understanding the key financial concepts and steps required to achieve those dreams was more challenging. For example, according to surveys of attendees in St. Louis and Atlanta: Less than one-third (31 percent) of respondents knew their FICO® Score; Fewer than two-in-five (38 percent) understood the factors that determine FICO® Scores; and, More than one-quarter (26 percent) thought annual household income was a factor used to calculate a FICO® Score (it’s not... [Read More]
Last week, FICO kicked off its Score A Better Future program with a community event focused on credit education at Harris-Stowe State University in St. Louis, MO. It was the first of our new series of free educational events across the country that bring together consumer advocates, credit educators and community leaders to help Americans learn about credit scores and financial tools to help them achieve their dreams. We partnered with a number of organizations focused on financial education and empowerment initiatives to bring the initial event together, including Justine PETERSEN, a St. Louis-based organization that assists low-income individuals and families to develop, maintain and increase financial assets, as well as National Consumers League, the St. Louis American, City of St. Louis Treasurer’s Office of Financial Empowerment, and the St. Louis Regional Unbanked Task Force. Check out a recap of the key highlights from the event: Consumers gain valuable credit... [Read More]
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).
Can scoring trended data, or more accurately, trended credit bureau data, as some credit score companies claim, actually help expand credit access to these consumers?
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]
Securitization plays a key role in driving increased liquidity in the mortgage market, ensuring that banks can fund more loans, at lower cost. This in turn gives consumers greater access to affordable mortgages. FICO Scores, of course, play an important role in the risk management and transparency that powers the secondary market. Now VantageScore is claiming that its score can be used instead in GSE underwriting (and by extension, securitization), as a one-to-one replacement for the FICO Score. Could a clean swap-out work? It’s time to set the record straight. Claim: A seamless mapping exists between FICO Score and VantageScore, one that will hold up over time. Truth: The FICO Score and VantageScore, while sharing the same score range, do not share the same odds-to-score relationship, meaning the risk at a given score is different. The relationship between the two scores is not constant and any analysis that attempted to... [Read More]
In the era of Big Data, so-called alternative data holds a special promise — to shine a new light on consumer behavior. When it comes to credit scoring, alternative data means data not being used today for risk assessment, and specifically data not found in the credit bureaus. Lenders hope scoring this data could allow them to make faster, better decisions on people who don’t have FICO® Scores — the “unscorables” with sparse or no credit bureau data on file. Hoping to jump on the alt-data bandwagon, the three main US credit reporting agencies – through their VantageScore business – have been claiming that their score uses alternative data to score more consumers than the industry-leading FICO® Score. It sounds good, but is it true? Claim: VantageScore leverages alternative data to score millions more consumers than FICO Scores. Truth: The “alternative” data VantageScore uses is utilities and cell phone bills... [Read More]
Participants and Influencers throughout the mortgage ecosystem have been told by the three main US credit bureaus through their jointly owned and controlled credit scoring firm, VantageScore, that the VantageScore can enable millions more consumers to gain access to a mortgage. It’s an appealing story — but is it true? Claim: Loosening credit scoring criteria will bring lenders an additional 3.4 million potential borrowers, over 2.6 million of whom will qualify for mortgage credit. Truth: Very few new people will both qualify for mortgages and want mortgages. The “innovation” VantageScore claims can score more people is simply the weakening of credit score criteria. The minimum criteria needed to produce the FICO Score aren’t arbitrary — they are the result of decades of research into risk assessment. As a reminder, reliable credit scores can only be calculated from credit files with at least one open credit account for at least six... [Read More]
