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Forward on Reverse: Attention HUD, Grandma Needs a HUG

Jan 02, 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 exist. "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 mode. 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 profitability." 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
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