The emerging credit score marketJoe Cornocredit scoring and reporting, FICO
I have held back as long as I can about credit scores and how
they are managed by various groups and companies. Credit scores
play such a pivotal role in determining borrower interest rates
that it is very upsetting to see consumers unduly penalized for not
having knowledgeable people assist them.
I am not promoting any credit repair business. I am directing my
comments to the originators and lending institutions that continue
their uneducated practice in regard to credit scores. After all, it
should be the retail lenders, along with their originators, that
seek the best possible loans for their clients.
What really happens is that we accept the scores and place the
borrower into a loan program and product that are usually worse
than what the borrower deserves. Of course, the originators and
their companies don't deserve full responsibility for this. The
creators of such scores never intended or wanted disclosure to the
public. The various scoring entities make it nearly impossible to
evaluate scores, yet the law requires score disclosure.
With vague reasons listed for each specific score, originators
and loan companies have had no one to turn to for assistance. This
topic has developed into a training course of mine because there is
nowhere else to learn it. You will not receive it from the various
creators and repositories.
They express that it is a complicated and ever-changing system
that cannot be understood via a simple training. They list matrices
to determine credit and explain with basic words something that is
very complicated. As an example, let's examine Fair Isaac Corporation's (FICO's)
Over the years, FICO has continually updated its scoring models.
Lenders use various models from past years, so there is not one
basic model in use. Various logarithms and analyses remain
consistent within all of the models, but as time passes, they do
not reflect current credit habits and trends.
The NextGen model, created in 2001 by Fair Isaac, has not been
incorporated by most investors and lenders. The variations between
the models can have a major impact on scores. Ginny Ferguson,
former chair of the National
Association of Mortgage Brokers Credit Score Committee, was
quoted in the Washington Post as saying, "When lenders use outdated
FICO models for pricing loans, we can run into major problems."
It is not just the difference between the classic and NextGen
score models that invokes confusion and eroded scores. The
variations of software within repositories have an impact, as well.
Equifax systems currently in use by lenders include Beacon, Beacon
Enhanced and Beacon 96. Beacon and Beacon Enhanced have been
discontinued and are no longer being distributed, but a lender can
still misread scores in Beacon 96 if the lender has not been
trained and educated on recent changes and modifications.
FICO's classic model has five industry versions being used by
wholesale lenders. This may explain why one investor may accept a
customers credit score, while a competing investor may not. The
lenders are pulling or evaluating data differently due to their
existing models. The two lenders receive different scores on the
same borrower due to the fact that they are accessing outdated
The above score models do not consider the systems of other
repositories. Empirica has three models out and operating today:
Empirica Auto 95, Precision Score and Precision 03. Combine these
with forthcoming titles like Pinnacle, Fair Isaac Risk Score,
VantageScore and Credit Expert, and the simplicity of trusting and
relying on an outdated credit score model comes into question.
There are some easy ways to understand what you are dealing
with. First, most lenders and investors utilize a CREDCO source for
validation. It is no longer a good idea to pull credit from any
other source, as there's a reason the lenders use it as their bible
and taut its drop-dead, absolute reliability.
I would not run a credit report for a retail lender anymore. I
would pull it through the lender's automated underwriting/loan
origination system or have the lender pull it for me. After all,
your credit report will impact the consumer's credit score, and the
lender will re-pull it to validate your report anyway. Commit and
dedicate to lenders that will pull the credit for you.
You need to know what type of score you are dealing with before
having the wholesale investor run the credit. There are sources
available that can issue a blended or independent score that is
within five points of actual credit scores. They do not impact
credit scores and cost in the $5-7 range. This is invaluable to an
originator working with credit scores today.
You need to ask each and every lender what model of scoring they
are using. With this information, the credit score suppliers can
run the actual model scenario that your lender will be utilizing.
Ask your credit supplier and lending source what model and version
of software they are using. You can lose days and money chasing
after incorrect scores. The variations in scores can be attributed
to the discrepancies within the differing software and updates.
Credit scoring and how to pull real and valid scores is quickly
becoming a trained talent in itself. Become educated on the score
models and versions. Learn what to do and how to work systems for
scores so that your borrowers do not continue to pay, in the form
of higher interest rates, for sloppy and outdated systems. With
lawsuits ever so prevalent, will any originator or retail lender be
immune to such business practices?
It will be the individual and class action lawsuits that will
bring the score disparity onto the front pages of newspapers. I
highly recommend that you strive for consistency and fairness by
keeping your individual and company knowledge current. Become
educated on this rapidly increasing and damaging problem. I have
seen many a great originator and company go broke defending an
action that they had no knowledge of.
Outsource this responsibility to an independent source other
than your credit provider or lending source. It is sad to say, but
today, you need to outsource to legal assistance that will fight
the score and obtain a quick response. This is precisely what the
independent score suppliers utilize to obtain actual data and
scores. They do as such without any financial burden to your
Which side of the fence are you on? Are you an originator or
retail lender that uses sources to save the borrower money, or are
you just delivering a higher rate of interest that they do not
deserve? Depending on your responses to these questions, you can
determine if you are vulnerable or not. More importantly, you can
determine if you are a service to the borrower or not.
Joe Corno is president of Utah-based We Be Consulting and
Seminars. He may be reached at (801) 836-2077 or e-mail [email protected]