Interest in credit scoring by Congress gets more detailedTerry W. Clemanscredit reports, House Financial Services Subcommittee on Oversight and Investigations, What Borrowers Need to Know About Credit Scoring Models and Credit Scores
On July 29, Rep. Melvin Watt (D-NC), chairman of the House
Financial Services Subcommittee on Oversight and Investigations,
held a hearing titled: What Borrowers Need to Know About Credit
Scoring Models and Credit Scores. The objective of the hearing was
to obtain testimony about the use of credit scoring models and how
credit scores are used in the extension of credit. Additionally,
Congress wanted information about the consumers ability to access
his credit score.
While the hearing was split into two witness panels, the first
featured testimony from credit scoring model developers from the
national credit repositories and Fair Isaac Corporation on typical
credit scoring basics, background and development processes in
generic terms. The second panel of witnessesthe researchers,
scholars and the consumer privacy experttestified on some of the
most compelling issues, which allowed the hearing to shift focus
from informational to the development of an investigational
perspective. Rep. Watt commented that this could set the stage for
another, more in-depth hearing on some of the issues that are most
crucial to credit scores, such as multiple score types, missing
data elements and non-traditional credit scores.
As a credit industry representative, it is enlightening to
observe these hearings, as it provides insight into the knowledge
bases of the specific representatives on the subject. From the
question and answer exchanges with the witness panel, one can also
access the members interest level in the subject matter, and this
hearing brought some of the leaders into the spotlight. Clearly,
the credit score veterans of the group present are Rep. Watt, and
Reps. Emanuel Cleaver (D-MO) and Gene Green (D-TX).
Rep. Cleaver, in particular, has an interest in exploring the
impact on the systems of all the non-traditional credit trade
lines, like utility company payments, landlords and many small
creditors, that either by choice or repository limitations have no
ability to report to the national credit repositories. Rep.
Cleavers story about his grandmother, who never used credit except
for rent and payments on a small insurance policy (both of which
would not show up in the credit databases), raised the question of
why fiscally responsible individuals who make these types of
financial choices should be deemed poor credit risks. Today, we are
fortunate to be able to gather these missing trade lines and make
them available for use in mortgage lending via programs like
Payment Reporting Builds Credit (PRBC), which offers a FICO-branded
credit score on bills that the consumer has already paid. Fannie
Mae, Freddie Mac and the U.S. Department of Housing and Urban
Development currently accept these non-traditional reports and
scores, and from the interest showed by members of this committee,
there will be additional pressure from Congress to expand their
acceptance.
Evan Hendricks, publisher and editor of the Privacy Times
newsletter and author of the book Credit Scores and Credit Reports:
How the System Works, What You Can Do, also testified in the
hearing. Hendricks introduced two additional topics that currently
create confusion for many consumers, as well as some of the
representative in the hearing. The first issue regards the vast
difference in the various credit score types offered to consumers,
and that many of the scores most commonly available to consumers
today are not the same scores used by lenders for loan
underwriting. Of all the Web sites offering consumer credit reports
and scores, most offer some version of what Hendricks refers to as
FAKO scores. These scores are FICO knockoffs that many times are
not accurate predictors for the consumers actual FICO score.
The second issue raised by Hendricks was that even if a consumer
does obtain an actual FICO score, unless that score was obtained
from a credit report from a potential creditor, the consumer credit
data file used to calculate the score will most likely be different
from the consumer credit data file used to create the score when
the purpose of the file access is for consumer disclosure. This is
due to the difference in procedures used by the credit repositories
in matching data for creditor requested credit reports vs. the
reports used for direct consumer disclosure. Since each has its own
specific purpose, each is accessed with that specific purpose in
focus, often creating much different results. When the data in the
report is different, the impact on the score calculated from that
data as reported to the consumer is not the same as when it is
reported to the creditor, even if the same FICO scoring model is in
use on both reports.
If the future brings further focus on these types of credit
scoring issue details in Congressional hearings, their awareness of
how the system really worksincluding its weaknesseswill provide the
potential for some great returns for the American consumer. The
foundation has been built by this hearing, and this subcommittee
seems focused on bringing Congress a greater understanding of the
process and the fairness in the specifics that are so important to
the final outcome. For more information about the testimony from
the What Borrowers Need to Know About Credit Scoring Models and
Credit Scores hearing, click
here.
Terry W. Clemans is executive director of the National Credit Reporting Association
Inc. (NCRA). He may be reached at (630) 539-1525 or e-mail
[email protected].
