The Unscorable Problem Gets Worse

Has the plight of the conventionally unscorable worsened? Unfortunately, based on a recent VantageScore analysis, it has been exacerbated.

The overall population in America has increased dramatically, even though the last decade has seen the slowest growth rate of all times. As the overall population has increased, so has the number of consumers who are not scoreable when conventional credit scoring models are used. Indeed, according to the Consumer Financial Protection Bureau, about 1 in 5 American adults have either no credit history, meaning that their credit histories were invisible, or unscorable. Consequently, these individuals have difficulty obtaining any new lines of credit. Furthermore, we estimate that based on the 2020 U.S. Census, the overall population grew 7.4 percent to 331 million people compared to the 2010 census report and the number of conventionally unscorable consumers (who can now be scored with the VantageScore model) also increased to approximately 40+ million. By contrast, according to the 2010 U.S. Census, the overall population was about 309 million; of which 30 to 35 million were conventionally unscorable but could be scored using the VantageScore model. The proportion of the adult population that is conventionally unscorable remains stable at nearly 16 percent. This represents an opportunity to make credit markets more accessible to additional consumers who have been historically underserved. While this is perhaps an argument for lenders to use more inclusive models such as VantageScore, that is of little solace to the consumers directly (and even adversely) impacted.

Consider the map below of the United States that shows the percentage of consumers within each state who fall into the conventionally unscorable category but can obtain a score using our latest model. There are significant pockets across the country, but states located in the South are clearly disproportionately impacted. Minority borrowers are also deeply affected. Our data shows that approximately 12.2 million African American and Hispanic consumers are conventionally unscorable (approximately 2.4 million have scores above 620), and approximately 1.6 million Asian and Pacific Islander consumers are also in this category (with more than 0.5 million with scores above 620).

These consumers, despite the fact that they have relatively low credit risk, face high interest rates and other potential adverse terms—if they can even access credit at all. Mortgage lenders, when offering loans to Fannie Mae or Freddie Mac, are required to use the same old pre-Great Recession scoring models from FICO, which makes homeownership for these consumers very difficult.

Critical for lenders and their regulators to understand is the predictiveness of the VantageScore credit score for these consumers. last year under the direction of then-director Mel Watt, FHFA published a proposed rule to implement credit score competition in the mortgage market as directed by Congress when it passed Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). This legislation was signed into law on March 24, 2018. In reality, however, the language of the proposed rule misreads the intent of the law. In fact, as proposed by the FHFA, it would have the opposite impact, thereby stifling innovation by perpetuating the status quo wherein a single source of supply, FICO, will continue to exploit its government-sanctioned monopoly for years to come without the markets benefiting from competition.

To be sure, not only would VantageScore be effectively barred from the industry, but based on how most experts interpret the language, so would virtually every other potential competitor to FICO – big and small. Plainly stated, we are seeking competition. And the law passed by Congress is intended to bring about just that, giving lenders a choice to use a validated credit scoring model (as required by the law) that could advance their business goals and provide greater sustainable homeownership opportunities for consumers during a time when it’s critically necessary. This potential win-win has been completely lost under FHFA’s leadership.

Make note: This is only a proposed language, and we expect to have the opportunity to more properly structure the rule with the new incoming FHFA director. We look forward to working with you towards that goal.