A World Without FICO Credit Scores: What Was It Like?

What you will learn:

• The impact of FICO® Scores on modern mortgage underwriting, credit risk assessment, and credit risk management.

• The advantages of FICO’s latest credit scoring model in enhancing predictive accuracy.

• The influence of different credit scoring models and how they impact the efficiency and loan liquidity in the mortgage market. 

• The importance of FICO’s newest credit score and how it enhances predictive credit risk management through inclusion of trended credit data.

With 28 years of experience in the mortgage industry, Anna Benz is a seasoned professional known for her exceptional leadership and expertise. She is currently the Senior Vice President of Non-Agency Lending at Movement Mortgage. Prior to joining Movement Mortgage, Anna held key positions at Union Bank, NAF, and People’s Choice as well as the Federal Reserve Bank of San Francisco. She has the reputation as a top, highly skilled industry leader and innovator which she now displays with Movement Mortgage.

Joe: You have been an industry leader for many years, including when getting a mortgage loan was often subject to personal whims. In fact, you have said, “I lived through a world without FICO® Scores, and I am scared to ever return to that world.” Describe what you mean by that? What was mortgage loan underwriting like before the FICO Score was widely used. 

Anna: Before the introduction of the FICO® Score to mortgage underwriting in 1989, underwriters followed an often subjective process to qualify applicants. The individual judgment of underwriters played an outsized role in determining a borrower's creditworthiness. 

For example, before the days of automated mortgage underwriting and FICO® Scores, there were manual credit reviews. Underwriters reviewed credit reports, looking at the number of accounts, types of credit used, length of credit history, and payment history to determine the risk profile. This required an often inefficient, time-intensive, and manual deep dive into each applicant’s financial background.

Along with this, there were often character assessments. Mortgage lenders would evaluate the character of the borrower through personal interviews, letters of recommendation, and sometimes even community reputation. This was especially common in smaller, community-based banks where personal relationships and the borrower’s reputation could significantly influence underwriting decisions. 

The introduction of the FICO® Score standardized credit risk assessment and made the process more objective, efficient, and consistent across lenders. This shift allowed for a more streamlined underwriting process, reduced the potential risk of disparate treatment, and facilitated the development of automated underwriting systems. 

Joe: Your company, Movement Mortgage, is a major retail lender and an early adopter of FICO® Score 10 T, the newest and most predictive FICO® Score ever. What were the considerations that went into Movement’s decision to begin using FICO Score 10 T?

Anna: One of the biggest reasons Movement Mortgage decided to use this credit score is its enhanced predictive power. FICO® Score 10 T incorporates trended credit data, which looks at the borrower’s credit behaviors over a longer period of time. This allows us to gain deeper insights into how mortgage borrowers manage their credit, providing a more accurate prediction of their future credit risk profile.

To us, the inclusion of trended data in FICO’s newest scoring model helps differentiate between borrowers with similar scores but different credit behaviors. For example, borrowers who consistently pay off their credit card balances in full every month can be distinguished from borrowers who only make minimum payments. This differentiation allows us to make more informed lending decisions to assess a mortgage borrower’s creditworthiness.

By using a more comprehensive view of a person’s credit history, we can better identify high-risk borrowers and potentially reduce default rates. This benefits both lenders and borrowers, as it leads to more sustainable lending practices.

The ability of FICO® Score 10 T to track credit utilization trends over time also enables us to make more informed decisions about credit limit adjustments. We can more accurately assess a borrower’s ability to handle additional credit, leading to more responsible lending.

In short, the adoption of FICO® Score 10 T aligns with our mission to provide responsible, innovative, and customer-focused mortgage lending solutions. It enhances our ability to assess credit risk accurately, offer competitive terms, and compete effectively as a leader in the mortgage industry.  

It also demonstrates our commitment to leveraging the latest technology to provide superior service and more tailored mortgage lending solutions for our clients. With a more accurate and comprehensive assessment of creditworthiness, we can offer better terms and conditions to our clients. This leads to higher customer satisfaction and expands credit access to more borrowers.

Joe: The FICO® Score has served as a great equalizer, allowing mortgage lenders to compare buy-boxes, and governments and banks around the world to buy and sell mortgage-backed securities with known and commonly understood credit risk assessments. What might the global landscape look like if everyone just used their own credit scoring models?

Anna: I believe that without a common standard, each lender’s unique model would produce different results, making it hard to assess and compare credit risk consistently. This would increase complexity in mortgage-backed security trading, as trading relies on the ability to assess the risk of the underlying mortgage loans in various pools across lenders. A standardized credit score provides a proven way to assess credit risk factors, facilitating the buying and selling of mortgage-backed securities globally. Without it, investors would struggle to evaluate the credit risks associated with different mortgage-backed securities of different lenders, leading to reduced liquidity and potentially higher costs of capital.

In fact, the use of different models could seriously fragment the market. Lenders and investors would need to understand and evaluate each unique scoring model, increasing due diligence costs and complexity. This fragmentation could hinder the flow of capital and reduce overall market efficiency. For lenders managing large loan portfolios, a standardized credit score simplifies credit risk assessment and management. Without it, portfolio managers would face difficulties in aggregating and comparing risk across different loans, potentially leading to suboptimal decision-making and increased risk exposure.

In a globalized financial market, standardized metrics are essential for facilitating cross-border trade and investment. The absence of a common credit score would create barriers for international investors and institutions, reducing the flow of capital and hindering global economic growth.

What’s more, regulators rely on standardized metrics to ensure that lending practices are fair and non-discriminatory, particularly in the area of regulatory oversight to prevent biases. A standardized credit score like the FICO® Score helps to mitigate these biases by providing a consistent framework for credit risk assessment. Without it, the risk of inconsistent and potentially unfair lending practices would increase.

In short, the use of a standardized credit score provides a common language for assessing credit risk, ensuring that lenders, investors, regulators, and consumers can operate within a consistent and transparent framework. While it’s beneficial to customize and enhance credit assessment models to meet specific needs, retaining a core standardized credit score is essential for the stability and growth of the financial system.

How FICO Can Help You

Want to learn more about FICO® Score 10 T?  

• Visit the FICO Score Migration Resource Center 

• Find out the 10 best reasons to migrate to FICO Score 10 T now

• Learn more about FICO® Score 10 T is the most powerful FICO Score ever

• Listen to the podcast: The FHFA Announcement, Trended Data, and Ten Reasons for FICO® Score 10 T