APRIL 30, 2015 BY MINDY LEISURE MANAGER OF RESCORING SERVICES
In an effort to help “unscorable” consumers, FICO has developed a new scoring model (yet to be named) based on alternative credit such as utility bills, rent, etc. This model will create scores for consumers who currently lack enough data to generate a traditional FICO score.
FICO has been “quietly” testing this new model since November of 2014 with 12 of the country’s largest credit card issuers.
“The experimental model can already be used to score more than 15 million of the more than 53 million consumers who lack enough credit history to be given a traditional score,” said Jim Wehmann, executive vice president of scores at FICO.
This new scoring model is not to be confused with FICO 09 which also incorporates some alternative data. FICO 09 however is a traditional scoring model in which consumers already have scores but the scores may be enhanced by incorporating some alternative data. The new scoring model is for consumers who are currently not scorable at all. This is a completely separate model from any of the traditional scoring models now used by lenders. While at present it is only being tested by some banks that issue credit cards, FICO hopes to start testing it in the mortgage arena once the trial period has concluded. It can be used as a stand alone product or used in conjunction with traditional models.
As with FICO 09 the big question will be whether or not Fannie and Freddie will accept it. As of now they won’t accept FICO 09. However they have acknowledged that they will at least look at the option of an alternative scoring model. The HUD Secretary has stated at a recent conference that FHA is also exploring alternative scoring models. If this new model were to become widely accepted it could open the door to mortgages for tens of thousands of potential homeowners who could not currently qualify for a mortgage.
There are, of course, some skeptics and a lot of questions still to be answered as to how well it will work. How the information is gathered seems to be one of the biggest hurdles. Most utility companies, landlords, etc. don’t have access to report to the bureaus like traditional creditors do. Therefore the information has to be extracted from various systems and assembled.
“Suppliers of such information that lack distribution via a credit bureau must find a way to deliver their data in a format that meets lenders’ specifications while demonstrating compliance with a series of safeguards,” said Brian Browdie with American Banker.
FICO has enlisted the help of Lexis Nexus and Equifax to help gather the alternative data. There is also a separate cost involved with the alternative model and a lot of banks and lenders have a budget for credit scores so having to pay extra for the new model could be a deterrent for some.
FICO is very excited about this product and realizes the positive ramifications it could have for millions of consumers. Hopefully with some fine tuning accompanied by the results of the trial period, some of the larger lending institutions and government agencies will agree that this new model will be helpful, and push to have it adopted into and accepted by the major entities that oversee lending.
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