Skip to main content

Mortgage technology and beyond ... Power investing

National Mortgage Professional
Mar 28, 2007

The world of credit: Fifty years of FICO (1956-2006)John J. Hudockcredit, Internet, Web based tools "FICO" is a registered trademark for a family of credit-risk scoring products and not a synonym for Fair Isaac Corporation. The risk score is the result of a mathematical algorithm formula using a variety of inputs, which predicts the likelihood that a person will become delinquent when repaying a credit obligation at some point in the next 24 months. These risk inputs are listed on each residential credit report. The intent of each of these statements is to justify the risk impacts involved in determining credit scores. It is generally accepted that FICO was first coined by credit bureau programmers to shorten their code for Fair, Isaac & Company (which was their official corporate name until 2003) whenever the programmers typed our names in the context of our credit risk scoring models. Although it's easy to understand why people might think FICO is still simply shorthand for Fair Isaac Corporation, the fact is that it is registered as a specific trademark. Using it as a corporate synonym is incorrect. Now, credit scoring models use both traditional and non-traditional sources for their workups. Traditional sources, current furnishers of information (creditors) reporting to credit bureaus via credit reports, public records, etc. are the majority of sources used. Lenders also use custom scores that take other information to which they are privy, such as the credit application information and the person's account history (if the applicant is an existing customer), to help predict different aspects of credit risk. The accuracy of the scoring system has always been questioned. According to a Fair Isaac representative, the lenders have always been aware of this situation, which is why they typically use manual underwriting practices to process credit applications from people with and without credit histories. Fair Isaac introduced its new FICO Expansion Score in July 2004 after roughly 18 months of development, so that means that Fair Isaac began formally addressing this particular problem in early 2003. I believe it has not been completely resolved and produces inaccurate conclusions in many situations. Regardless, Fair Isaac was one of the fastest growing companies in the world. Fair Isaac still has a lot to say about whether you get a loan. They are a leading developer of credit scoring systems. The firm offers statistics-based predictive tools for the consumer credit industry. Customers include credit card companies, retailers, commercial lenders, insurers and telecommunications service providers. Fair Isaac's analytic and decision-management products and services used around the world include applicant scoring for insurers and financial-risk and database management products for financial concerns. Their income appears to come from the following service areas: 1. Collections and recovery 2. Fraud prevention 3. Mortgage banking 4. Consumer solutions 5. Marketing services 6. Insurance solutions 7. Risk scoring services 8. Pre-score services On April 6, 2004 on their Web site, www.fairisaac.com, Fair Isaac began indicating that their services were being used to make decisions 25 billion times each year, 68.5 million each day and 793 times each second. That's a lot of decisions! Fair Isaac has since stopped illustrating its daily, monthly and yearly decision statistics. Where did it all start? Mr. Fair and Mr. Isaac started Fair Isaac with an initial investment of $400 each. In their first year, they developed a complete billing system for Carte Blanche, one of the first credit cards. They incorporated in 1960, and in 1961, Fair Isaac moved to San Rafael, Calif. The two men led very private lives. We have been researching specifics since 1999, and our conclusions have been very limited. William Rodden Fair (1922-1996) Bill Fair, as he was known, was born in California on Dec. 13, 1922 and died Jan. 19, 1996. Rodden was his mother's maiden name. Fair was one of the two founders of Fair Isaac. He was chairman of the board of directors, as well as president of the company, from the company's incorporation in 1960 until his retirement in 1991. After his retirement, he continued as consultant to the company on technical matters and also served as chairman of the board. Fair received degrees from the California Institute of Technology, Stanford University and the University of California, Berkeley. He also had membership in many organizations, such as the American Association for Advancement of Science, the Society of California Pioneers, The Institute for Operations Research and the Management Sciences, and Caltech Associates. Earl Judson Isaac (1921-1983) Earl J. Isaac was recognized as an excellent mathematician. He was born in New York on Aug. 7, 1923. His mother's maiden name was Fuller, and he died at the age of 62 in Marin, Calif. on Dec. 12, 1983. There's little more known about Isaac. Together, they developed the scoring system using a combination of item scoring, factoring and segmentation, which can predict an individual's potential credit default risk. Mathematically, they revolutionized the way the financial services industry extended credit. In 1970, FICO developed the first scoring system for a bank credit card. This credit card was offered by Connecticut Bank and Trust. Then, in 1989, Fair Isaac installed the first general-purpose FICO scoring system at Equifax, named BEACON. Two years later, Fair Isaac's reign of power began when all three national credit bureaus - Equifax, Experian and TransUnion - started utilizing the risk scoring system. With this venture, they have grown to the point where they now have almost absolute control over the entire credit scoring industry. In 1998, as Fair Isaac's rapid growth had the company bursting at the seams, it started work on a new corporate headquarters near downtown San Rafael. The company didn't move any employees or business functions. That's because most of the executive team had already migrated to Minnesota over the previous few years, starting when the company hired Minnesota resident Thomas Grudnowski as its chief executive on Dec. 2, 1999. But after Grudnowski took the helm, Fair Isaac backed out of the deal. Only two of the planned four buildings were erected, and only 40 percent of the space was leased, according to Paige Steers, spokeswoman for building owner Equity Office in Chicago. According to proxy statements filed with the U.S. Securities and Exchange Commission, Grudnowski earned $1,370,128 in salary and bonuses alone in 2002, up from $813,463 in 2001 - a raise of 68 percent. He made more than $3.1 million in salary, bonuses, stock options and other compensation in 2005. (By comparison, Thomas F. Chapman, chairman and CEO of Equifax, received $5,627,589 in total compensation in 2005, almost a year after he announced his retirement. On Sept. 21, 2005, Rick Smith became CEO of Equifax.) Fair Isaac already had a significant presence in the Twin Cities, having acquired database-marketing company Dynamark in 1992. On April 13, the company hired Charles Osborne as chief financial officer from the University of Minnesota Foundation. Fair Isaac's global sales, human resources, marketing and information technology departments are all based in Minnesota. San Rafael remains home to employees who work on the research and development of Fair Isaac's trademark analytics tools, software product development and business development, according to Larry Rosenberger, who was once the companys CEO and now is vice president of analytic research and development. In 2004, Fair Isaac, considered the backbone of the lending industry, moved its corporate headquarters to Minneapolis. 2004 Employees: 3,058 2005 Employees: 2,796 The company is operating in more than 60 countries, offering financial solutions to most of the world with its credit analysis. Fair Isaac is using genetic algorithms as part of its new predictive technology. It is calling them "Adaptive Random Trees" (ART) and claims they allow a better way to build decision trees for attaining specified projections. Fair Isaac has constantly been developing methods to determine incremental predictive power. Some might say that Fair Isaac's traditional segmentation method relies too heavily on past activity, as does ART. Many argue that any activity that is almost seven and 10 years old should not be part of today's creditworthiness evaluation. In many instances, as part of Fair Isaac's scoring and the repository reporting, an ill-advised bankruptcy damages an individual's financial reputation for ten years. This time frame may be too long to have a realistic effect on one's current creditworthiness. It could be argued that Fair Isaac has infringed on our financial privacy to too great a degree, but it has succeeded in developing a standard uniform credit comparison system that was necessary for our banking system. I hope detractors realize that a program cannot be created to allow an individual to correct his own credit history while still maintaining accuracy and integrity. But Fair Isaac's reign as undisputed king of the credit scores may be coming to an end. On March 14, 2006, in an unprecedented cooperative venture involving the three national credit bureaus, VantageScore was released. VantageScore is an innovative consumer credit risk score offering greater consistency and predictability to consumers and credit grantors. Its patent-pending development methodologies enable institutions to rank a consumer's creditworthiness more accurately than other scores currently available in the marketplace. In my opinion, however, the VantageScore marketing team's approach in launching this product was very ineffective. They concentrated on the consumers and credit-counseling agencies instead of the credit resellers and lenders. It is irrelevant to consumers and credit-counseling agencies what scoring method is being used. The only common consideration is accuracy. John J. Hudock is president of The International Credit Club and The World of Credit, two companies specializing in credit report problems and scores. He also has online continuing education courses on credit approved by the Pennsylvania Department of Banking and the Pennsylvania Department of Continuing Legal Education. John can be reached at (877) 829-5432 or e-mail woc@epix.net. He invites e-mails on any credit topic, will answer each one and publish any that will benefit his readers. Please be specific with your questions.
Ocwen Financial To Acquire Reverse Mortgage Servicing Platform

Ocwen Financial Corporation's wholly-owned subsidiary, PHH Mortgage Corporation will acquire RMS' reverse mortgage servicing platform.

Industry News
Jun 18, 2021
UniteCT Emergency Rental Assistance Succeeds

Thanks to the successful launch of the UniteCT program, emergency rental assistance funds are helping Connecticut residents maintain housing.

Industry News
Jun 17, 2021
Angel Oak Mortgage Announces Initial Public Offering

Angel Oak Mortgage announced its initial public offering of 7,200,000 shares of its common stock at $19 per share.

Industry News
Jun 17, 2021
Mortgage Apps Rebound After Three Consecutive Weeks Of Declines

The Mortgage Bankers Association reported the first increase in mortgage applications after a three consecutive weeks on declines.

Industry News
Jun 17, 2021
CFPB New Rule Prevents Predatory Lending To Military Service Members

The CFPB stipulates its authority to examine supervised financial institutions for risk to active duty servicemembers and their dependents.

Industry News
Jun 16, 2021
Inventory Begins A Slow Recovery

Inventory grew 3.9% from April to May, according to Zillow's latest Market Report, after a year of steady decline.

Industry News
Jun 16, 2021