Forward on Reverse: Attention HUD, Grandma Needs a HUG

Forward on Reverse: Attention HUD, Grandma Needs a HUG

January 2, 2003

The credit underserved are finally invited to the lending tableJackie FinlanUnderserved,credit reports,Fair Isaac Corporation,FICO,CRA
Visit any university in the United States and you're likely to
see a familiar scene: vendors signing up students for their first
credit card. As credit limits bow and interest accrues, young
adults quickly maim their infant credit reports and unwittingly
brand themselves as high-risk borrowers. Immigrants, recent widows
or divorcees, even individuals who deal primarily in cash, are
equally stigmatized, because they are completely absent from the
credit reporting agencies' (CRAs) databases or do not generate
enough hits to compile an adequate enough credit report, thereby
making it difficult for lenders to accurately assess credit risk.
If you have never applied for a credit card or your credit activity
has not been reported to the national CRAs, you might be an
unfortunate member of the "credit-underserved" market. Of the 215
million credit-eligible people in the United States, approximately
50 million have insufficient or non-existent credit bureau files,
which are required for a credit score, making it nearly impossible
to qualify for a car loan or obtain a mortgage.
The Fair Isaac Corporation has responded to the underserved
market's need with the introduction of its FICO Expansion score, a
credit score based on non-traditional data. This extension of the
FICO score family integrates non-credit financial data, which is
not reflected in the national credit bureaus' databases, with
CRA-supplied information to help create a consumer credit report.
Non-traditional data reflects a consumer's payment activity
regarding rent and utility bills, checking accounts, purchase
product payment plans and employment history, to name a few. The
additional information produces a more indicative prediction of
whether a consumer will default on future payments or not, and
creates a financial opportunity where one previously did not
"This extension of the FICO score gives lenders and other
businesses another powerful tool for building and growing their
presence in high-demand and emerging markets, while expanding
service options for consumers who have missed out on opportunities
simply because they lack a traditional credit history," said Tom
Grudnowski, CEO of Fair Isaac.
Financial institutions have been widely criticized for
neglecting the underserved market's credit needs. The U.S.
Department of Housing and Urban Development has released
disconcerting statistics stating that certain government-sponsored
enterprises, between 1999-2002, have trailed the majority of the
primary market in providing affordable housing options to low- and
moderate-income families. In addition, federal regulators
continuously review financial institutions' compliance records
regarding acts such as the Community Reinvestment Act--established
to prevent redlining and encourage banks and thrifts to meet the
credit needs of all communities--especially when considering major
corporate activities, including mergers, acquisitions and charters.
Consumers themselves demand a minimum level of performance from
their financial service providers. They desire unlimited access to
financial products and condemn lenders when problems arise. They
are much more knowledgeable of the credit process, and exact
fairness and accuracy in pricing.
The FICO Expansion score addresses these pressures and benefits
those who, up until now, were disregarded financially. It employs
the same analytics, scoring range and a similar scaling model that
the Classic and NextGen FICO scores use, yet relies on data
otherwise omitted from traditional credit reports. Fair Isaac has
created a wholly owned subsidiary to calculate and deliver these
new scores. Fair Isaac Credit Services Inc. gathers information
from network data providers, integrates the information into the
consumer reports, verifies the accuracy of the data, monitors
security and ensures regulatory compliance. In addition, it
constantly seeks out new information sources to better increase
consumers' chances of qualifying for a loan. The credit reports are
supplemented by score and reason statements, which serve to better
communicate why a consumer's credit score was not higher. The
subsidiary handles consumers' inquiries for reports and scores,
manages disputes and oversees the resolution process. While the
service will be used for loan originations initially, pre-screening
and account management capabilities are on the horizon. The service
is now available to lenders through Fair Isaac's business and
consumer portal Web site,, and in batch
While the Expansion score exists to satisfy the needs of the
underserved, the innovation poses a significant gain to lenders, as
well. Competition for consumers in the financial industry is
fierce, as mergers and acquisitions have created a handful of large
banks that offer extended credit benefits to consumers, while
eroding profit margins for lenders. The FICO Expansion score will
augment the market by 50 million individuals.
"Certain segments of the U.S. population are experiencing rapid
growth, largely through immigration," said John Kessler, manager of
research at Purchase Street Research. "By accessing non-credit
information sources and tools such as Fair Isaac's FICO [Expansion]
score to evaluate credit risk, financial service institutions can
increase both their total portfolio size and overall
It is estimated that during the next five years, 70 percent of
lenders' growth will originate from the underserved market. If
lenders underwrite for an additional three percent of the market,
proceeds of approximately $300 million in credit cards and $3
billion in mortgage loans will be generated.
The new scoring service blends seamlessly into current automated
systems, nullifying concerns of additional operational costs. The
Expansion score eliminates the need for manual review, another
expensive and time-consuming stage in assessing risk, and thus,
further modernizes the scoring process. According to Craig Dillon,
vice president of Fair Isaac's Scoring Solutions, there is only a
small percentage of agencies and lenders who currently perform
manual reviews of additional data in a credit report.
"This [manual review] is completed using simple hurdle rules as
to whether sufficient information is provided, and is very
expensive to do since it's a manual process. This is very similar
to the way credit was handled for the entire population 15 years
ago, before the FICO score was created. So, this new FICO score
will automate the process for those lenders who have started this
type of manual process, as well as add considerably more
statistical accuracy. In addition, because our score is automated,
we have incorporated a lot more data than may typically be used in
these manual review processes," stated Dillon.
For consumers who need an Expansion score, there is no stigma
associated with it in comparison with a Classic or NextGen score;
those who need an Expansion score are already classified in a
low-tier lending category. In this case, rather than being
automatically denied an opportunity to obtain credit, the
underserved consumer can work with a lender, establish a healthy
credit history over time and eventually create a veritable credit
report, enabling the consumer to advance their quality of life.
For more information, visit