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FICO® Scores are designed to rank-order the expected future payment performance of consumers’ credit obligations based on their observable credit bureau attributes, irrespective of the economic environment. Lenders may calibrate FICO Scores based on their own loan portfolios’ recent performance to predict the odds of satisfactory payment performance.
However, disruptions to the economic environment can change these repayment odds in a way that differs from a lender’s calibrated estimates, leading to discrepancies between predicted and actual future default odds, and therefore to sub-optimal decisions and analysis results. Such disruptions reveal “latent risks” across portfolios that only manifest themselves during periods of economic stress.
This white paper covers two questions which naturally arise: