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National Mortgage Professional
Nov 08, 2006

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) scoring system. 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Association of Mortgage Brokers Credit Score Committee, was quoted in the Washington Post as saying, "When lenders use outdated FICO models for pricing loans, we can run into major problems."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 score models. 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 borrower. 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]
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