My friend George Souto posted a blog about credit scores that I just had to expand on.Why We Have Credit Scores, How They Were Created, & How They Are Used?
It’s a good post as far as it goes!
George tip-toed around the reasons and all of the history and the ongoing problems. This takes nothing away from his post only expands on it.
As you said under the old system "Loan Officers" made decisions. If they didn’t like you, you didn’t get the money! Discrimination happened.
In about 1970 the race questions were removed from the 1003, application form they had been in the client ID box. Less than 6 months later they were returned to the bottom of the form, but below the signature line. None of this made sense because the man (mostly) making the decision had taken the application, he knew who the applicant was!
Next came the anonymous "Loan Committee." The "Loan Committee" was no different, the Fed’s required the racial information on the 1003 and the committee saw it, they looked at the bottom of the page, too! A few suits later and lenders looked for a better solution.
The financial crisis of 1973 saw a huge change in mortgage lending! Until then local banks and savings and Loans had dominated mortgage lending, but the Mortgage Brokers took over and dominated by the end of 1974.
Auto dealers had a 10 point system because dealers couldn’t be trusted to make loan decisions. Mortgage lenders longed for such a system it would end claims of discrimination and allow for automated decisions.
The Fair Isaac Company, FICO came up with a workable model, it’s arbitrary, it’s based on An The financial crisis of 1973 saw a huge change in mortgage lending! Until then local banks and savings and Loans had dominated mortgage lending, but the Mortgage Brokers took over and dominated by the end of 1974. It’s Anecdotal totally eliminating common sense in lending! But, raciest it’s not!
FICO and it’s competitors final allowed for automated mortgage lending! I was the first broker in Nevada on line with Freddie Mac, a friendly in Vegas beat me with Fanny Mae and Gennie Mae.
It was great calling the wholesalers and telling them I had an approved loan what would they pay for it?
There was and there remains a problem! It’s true most people with good credit histories have good FICO scores, but the many people with bad scores are very credit worthy!
To fight discrimination and for continence we/the scoring agencies have discriminated against every one who doesn’t fit the common model! Being different isn’t a protected category.
Good people with low scores fostered the "sub-prime" industry. Most "sub-prime" loans are successful, contrary to public opinion.
I’ve worked under the old system, where it was who you know and do they like you, and I’ve worked under the knew system based on who you are! I can control who I am, but can’t control who dislikes me!
I love the convince, but loath the stupify! I have a solution, allow automated approvals, but disallow automated turn-downs, require human review and allow common sense approvals.
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