The last few years were full of “change” for our industry, but thankfully, credit scoring hasn’t been one of them. “What” you say? “But I read somewhere that scores were completely different now. What is going on?” Since 2006, there have been many announcements about new scoring models that are competing for acceptance in the mortgage space. Quite a few entities need to put their seal of approval on a scoring model before we can use it, including the rating agencies, Wall Street, Fannie Mae, Freddie Mac, the credit bureaus and our lenders. There are also a few pending lawsuits that may need to be settled.
Two scores are currently going through that process, VantageScore and FICO 08, and neither have been fully accepted. However, both models have had a significant amount of attention in the media. VantageScore has been silent for the past few months, but FICO 08 is being implemented by the bureaus now, and is receiving attention. These press releases prompt questions from NAMB members about what has changed already, and what should we expect?
First, only Trans Union and Experian have released their versions of FICO 08. It is still unknown if and when Equifax will do the same. Secondly, the government-sponsored enterprises (GSEs), Wall Street and lenders will have to start using it. That process could take many months or even a few years.
So, what stays the same and what changes? FICO 08 has the same “look and feel” as the older models. It still uses the same 300-850 scoring range, and inquiries are still treated the same as we know today. However, it uses newer versions of bureau data, which means that it has more information to draw from when making its score. Using these new fields allows for some new changes that make it a stronger model than ever before.
Collections, judgments and tax liens that were originally under $100 are no longer evaluated by the model. We have been told that subsequent collection attempts that add to the balance are still overlooked as long as they are reported correctly.
Balances on revolving accounts are weighed more heavily. You will see a greater score change as you hold different balances across your credit cards. Also, a single delinquency will not hold the same negative impact as in previous models.
And lastly, authorized users get their own special treatment using proprietary logic. Originally, authorized user accounts were reported to be completely ignored, but the threat of an Equal Credit Opportunity Act (ECOA) lawsuit forced them to be included. The final result is a revised model that considers spousal authorized user accounts, but diminishes the impact from “piggybacking” an authorized user. This is not a complete list of changes, but are the ones that the Credit Scoring Committee of the National Association of Mortgage Brokers is most frequently asked about.
Keep this in mind: Credit is an illusion that has purpose. It is only useful in relation to a goal and a time frame. The time frame for FICO 08 may be farther out than many people need if they are going for a house right now, so stick with what you learned before. The NAMB Credit Scoring Class is still one of the premier credit education sources for your lending needs. And rest assured that when FICO 08 becomes fully accepted, NAMB will be providing you with the most up-to-date information.
Dave Wheeler is a regional account with Credit Plus Inc. is a member of the NAMB Credit Scoring Committee. He may be reached by phone at (610) 462-3763.