Page 6 - EQ Mag-2019
P. 6


     The unscoreables

     problem gets worse

    By: Barrett Burns

            as the plight of the conventionally unscoreable       little solace to the consumers directly (and even
            worsened? Unfortunately, based on a recent            adversely) impacted.
     HVantageScore analysis, it has been exacerbated.
                                                                  Consider this map (on page 6) of the United States
     As the overall population has increased, so has the          that shows the percentage of consumers within each
     number of consumers who are not scoreable when               state who fall into the conventionally unscoreable
     conventional credit scoring models are used. Indeed, we      category but can obtain a score using our latest
     estimate that based on the 2017 U.S. Census, the             model.
     overall population grew to more than 326 million and the

                                                                                                                               models from FICO, which makes homeownership for              without the markets benefiting from competition.
                                                                                                                               these consumers very difficult.
                                                                                                                                                                                            Our press statement is included in the newsletter as
                                                                                                                               Critical for lenders and their regulators to understand      well.
                                                                                                                               is the predictiveness of the VantageScore credit
                                                                                                                               score for these consumers. Included in this month’s          To be sure, not only would VantageScore be
                                                                                                                               newsletter is a white paper that explores how more           effectively barred from the industry, but based on
                                                                                                                               modern modeling techniques like machine learning             how most experts interpret the language, so would
                                                                                                                               facilitate more accurate risk assessments. It also           virtually every other potential competitor to FICO –
                                                                                                                               shares research on how new account payment                   big and small.
     number of conventionally unscoreable consumers (who          There are significant pockets across the country, but         behavior for unconventional consumers is similar to
     can now be scored with the VantageScore model) also          states located in the South are clearly                      conventionally scored consumers. To learn more               Plainly stated, we are seeking competition. And the
     increased to approximately 40 million.                       disproportionately impacted.                                 about the study, be sure to check out the article.           law passed by Congress is intended to bring about
                                                                                                                                                                                            just that, giving lenders a choice to use a validated
     By contrast, according to the 2010 U.S. Census, the          Minority borrowers are also deeply affected. Our data        Also, as you may have read in the press, last month          credit scoring model (as required by the law) that
     overall population was about 309 million; of which 30 to     shows that approximately 12.2 million African-               under the direction of then-director Mel Watt, FHFA          could advance their business goals and provide
     35 million were conventionally unscoreable, but could be     American and Hispanic consumers are conventionally           published a proposed rule to implement credit score          greater sustainable homeownership opportunities for
     scored using the VantageScore model.                         unscoreable (approximately 2.4 million have scores           competition in the mortgage market as directed by            consumers during a time when it’s critically
                                                                  above 620), and approximately 1.6 million Asian and          Congress when it passed Section 310 of the                   necessary. This potential win-win has been
     The proportion of the adult population that is               Pacific Islander consumers are also in this category          Economic Growth, Regulatory Relief, and Consumer             completely lost under FHFA’s leadership.
     conventionally unscoreable (but can be scored by             (with more than 0.5 million with scores above 620).          Protection Act (S. 2155). This legislation was signed
     VantageScore) remains stable at nearly 16 percent. This                                                                   into law on March 24, 2018. In reality, however, the         Make note: This is only a proposed language, and we
     represents an opportunity to make credit markets more        These consumers, despite the fact that they have             language of the proposed rule misreads the intent of         expect to have the opportunity to more properly
     accessible to additional consumers who have been             relatively low credit risk, face high-interest rates and     the law. In fact, as proposed by the FHFA, it would          structure the rule with the new incoming FHFA
     historically underserved.                                    other potential adverse terms—if they can even               have the opposite impact, thereby stifling innovation         director. We look forward to working with you towards
                                                                  access credit at all. Mortgage lenders, when offering        by perpetuating the status quo wherein a single              that goal.
     While this is perhaps an argument for lenders to use         loans to Fannie Mae or Freddie Mac, are required to          source of supply, FICO, will continue to exploit its
     more inclusive models such as VantageScore, that is of       use the same old pre-Great Recession scoring                 government-sanctioned monopoly for years to come
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