FICOŽ scores were developed by Fair Isaac & Company, Inc. for
each of the credit repositories. The scores are: (Equifax) BeaconŽ,
(Experian formerly TRW) Experian/FICO and (TransUnion) EmpiricaŽ.
They are simply repository scores meaning they only
consider the information contained in a person's credit file; they
do not consider a persons income, savings or amount of
a down payment for a mortgage.
The scores were designed to assess risk. They are useful in
directing applications to specific loan programs and to set levels
of underwriting, i.e. streamline, traditional or second review. The
scores are objective, consistent, accurate and fast.
Many people in the mortgage business are skeptical about the
accuracy of FICO scores. Scoring has only been an integral part of
the mortgage process in the past few years; however, the scores have
been in use since the 1950's by retail merchants, credit card
companies, insurance companies and banks for consumer lending. The
data from large scoring projects emphasizes the accuracy, the
predictive quality of the scores. Large portfolios have been scored
for mortgage servicing and investment groups, and again, they
demonstrate that FICO scores work.
The scores were developed from each repository's database using
actual loan performance. A sample of over 750,000 consumers per
repository was used. The repositories have each made great strides
to increase the accuracy of their respective database through
computer technology and internal monitoring. There is a new standard
reporting format for credit grantors to use when sending electronic
information to the repositories; this is the critical first step to
providing accurate data.
The scores use a multiple scorecard design. Each repository uses
10 individual scorecards, and the models at each repository are the
same. This increases accuracy and optimizes the predictive variables
for each subpopulation. (For example, a borrower with two 30-day
late payments will be scored against a population with some minor
delinquencies.) This feature may cause a borrower with delinquencies
to score in the same range as a borrower without delinquencies.
Scorecards are reviewed and updated every twenty-four months.
The actual scoring process is proprietary, and the algorithms are
copyrighted. We can share the predictive variables, the portion of
the credit file considered and the weight as provided by Fair Isaac.
They are:
- Previous credit performance (35%)
- Current level of indebtedness (30%)
- Time credit has been in use (15%)
- Types of credit available (15%)
Installment loans, revolving accounts, debit accounts
- Pursuit of new credit (less than 5%)
FICO has changed the way it factors credit checks, inquiries.
These changes should minimize the "negative" effects that aggressive
rate shopping or the normal mortgage process can have on a mortgage
applicant. In the new Beacon version, the deduping process has been
expanded beyond seven days. One variable counts the number of days
within 365 days of scoring. If there has not been an inquiry, the
deduping mechanism is not activated. If there is a consumer
originated inquiry within the past 365 days from mortgage or auto
related industries, these inquiries are ignored for the first 30
calendar days from scoring; then, multiple inquiries within the next
14 days are counted as one. Each inquiry will still appear on the
credit report.
Scores should not change significantly because the variable in
the model using inquiries contributes less than 5% of the predictive
power of the model. According to Equifax statisticians, an average
of 5% of the credit reports in the Equifax consumer credit reporting
database (over 200 million consumer files) will see a change in
score due to this. Fewer than 5% of those will see a change
significant enough to effect a loan decision.
In order to get a score a borrower must have the following
conditions in his/her file:
- No "Deceased" indicator on the credit file
- At least one undisputed trade line that has been updated in
the last six months
- One trade line open at least six months
Scores range from 350 (high risk) to 950 (low risk). A scorecard
of 660 will be 660 on Beacon 96, Empirica and Experian/FICO if the
data on each file is the same. However, each repository is likely to
contain different data.
Every score is accompanied by a maximum of four reason codes.
Reason codes identify the most significant reason that a consumer
did not score higher. They are not red flags. Consumers with scores
in the 800 range get reason codes just as consumers with scores in
the 500 range. The reason codes may be used in describing to the
consumer the reason for adverse action. Scores are not part of the
credit file and are not covered by the Fair Credit Reporting Act.
Scores, if disclosed to the consumer, must be related to the credit
file - using the reason codes - since the score has no meaning in
itself; the meaning or risk level is assigned by the lender and the
investor.
When applicants have erroneous information reported, document the
inaccuracies. The easiest way to do that is to have your
credit-reporting agency upgrade the merged in-file to an edited
mid-range report or to a Residential Mortgage Credit Report. With
the upgraded report, you can ignore the score! The
file will have to be handled in a traditional manner for
underwriting and investment purposes. The developed report will
provide the paper trail that investors want.