Fine-Tuning Decisions


Upcoming changes to credit-scoring models could boost the borrowing ability of more consumer

By Kerry Curry

FICO, the widely used credit rating software system, is undergoing changes that will alter how the software will calculate the credit scores for many consumers. The changes, which are embedded in the software’s analytical model, should raise many consumers’ scores, making many more qualify for mortgages and other forms of credit, several industry analysts say.

The FICO Score 9 model, produced by Fair Isaac Corp. in San Jose, Calif., is under review by the country’s three major credit bureaus, which will likely make the new software’s credit-scoring analytics available to the credit bureaus for testing this fall. Adoption by community banks of the model is still likely a year or more away as lenders gradually upgrade to the new model.

However, the planned FICO changes are only one effort to improve credit-scoring model options for lenders. Fannie Mae and Freddie Mac are studying whether to adopt alternative models from other companies, a decision that could reshape the underwriting, costs and standards of secondary-market home loan approvals, as well as the availability of mortgage credit overall. Earlier this year influential lawmakers on Capitol Hill urged the Federal Housing Finance Agency to prod the housing government-sponsored enterprises to consider using more than one credit-scoring model to promote greater choice and innovation in the decision-making systems that lenders use.

As a result, one new credit-scoring system Fannie Mae and Freddie Mac are evaluating is from VantageScore Solutions LLC, a company started by the credit bureaus Equifax, Experian and TransUnion. A decision on whether Fannie and Freddie would allow lenders to use credit scoring models other than FICO appears months away, industry reports say.

Regardless, the initial reaction is that FICO Score 9 could be good news for lenders, say several banking and lending analysts. One reported change is how FICO Score 9 will provide additional analysis of borrowers who have limited credit histories. For such consumers, FICO Score 9 is being touted as more predictive of their likelihood to repay a debt. 

To help solve that challenge, FICO Score 9 will look more granularly at the few accounts consumers may have to assess the varying degrees of how they managed their financial obligations, Fair Isaac reports. The new system will reportedly give greater leniency to a consumer who may have not paid one bill, compared to a consumer who has struggled to pay several bills. 

One example might be medical debts. FICP Score 9 has been designed to overlook any paid medical collection on a person’s credit history in particular and will not automatically count unpaid medical collections against a score if the person’s unpaid bill is the only negative item in his or her credit file. Consumers could end up with a medical debt in collection because they didn’t know they were responsible for it—not because they can’t afford to pay it, reasons Anthony Sprauve, senior consumer credit specialist at Fair Isaac. Miscommunication within a complicated medical reimbursement system between the health insurer, health provider and the consumer over who is responsible for a bill is common, he adds.

Under FICO Score 9, a person whose only negative indicator is an unpaid medical debt could see his or her FICO score rise by a median of 25 points. “In the instance where the only negative in a person’s credit history is an unpaid medical debt in collection, that is not an indicator that they are having trouble paying their bills,” Sprauve says.

Charles Wendel, president of Financial Institutions Consulting in New York, says community banks that can afford to invest in new technology such as FICO’s new scoring model could have a competitive advantage over those that don’t.

Wendel says many banks have narrowed their credit conditions and terms so much since the housing crisis and recession that many creditworthy borrowers are being ignored by the industry. “In other words, they are going to have to be willing to rely more extensively on the scoring, and their credit people are going to have to be comfortable with it,” he maintains. “In many cases, that is not the case today.”

Kerry Curry is a financial writer in Texas.