On January 23, 2020, The Wall Street Journal reported, “Fair Isaac is making changes that will create a bigger gap between consumers deemed to be good and bad,” by Anna Maria Andriotis. So, this is really a news flash in a podcast, then transcribed into a blog post. I’m putting it out there because it’s important and one of the things that I’ve learned about the non-prime aspect of mortgages is that everybody will come out and tell you, “This is how it’s going to be. I am an expert. And this is going to play out a certain way.” The reality is, it never plays out like the experts say.
Obviously, this will have a change on the lending industry. What kind of change is the real question? In my opinion, it will be the unintended consequence type of change. The “Experts” will make claims about the impact of the change. Later, when their claims don’t come to fruition, the experts will come out and say, “The reason it didn’t go this way was because…..” Then they’ll act like they’re also an expert on this, even though they were wrong earlier. Anyways, that’s just me griping.
“Fair, Isaac, the creator of the FICO score will soon start scoring consumers with rising debt levels and those who fall behind on loan payments will be graded more harshly. It will also flag certain consumers who sign up for personal Loans.” I think they’re referring to payday loans, because they mentioned unsecured debt. I don’t know for certain.
“The change will create a bigger gap between consumers deemed to be good and bad credit risk. Consumers with already high FICO scores of about 680 or higher who continue to manage their loans will likely get higher scores.”
Later in the article, it mentions the fact that lenders have been asking Fair Isaac to adjust their algorithms so they can more closely identify good borrowers. I am not a credit expert; I don’t claim to be a credit expert and I’m not offering any credit advice. I can tell you that I have associates who are credit experts and basically, what Fair Isaac is doing is adjusting their algorithm.
It’s just an algorithm. The data goes in, and they give certain advantages to this, or they knock you down for that. But it’s all a mathematical formula. It’s an algorithm and they’re tweaking their algorithm to try and identify certain characteristics of borrowers who will pay their loan back, or borrowers who won’t pay their loan back. In the mortgage industry, we use a commercial algorithm. That’s important, because in the auto industry, they use a different algorithm. That’s why you see some people, like your buddy, get a new car and you’re thinking, “That guy hasn’t paid a bill on time in 20 years. How did he get that car?” Well, it’s a different algorithm. And so they base their risk assessment differently than the mortgage industry. My guess is that the mortgage industry probably has the toughest algorithm because they have the most at risk.
There are different algorithms that are used, I refer to one of them as a retail algorithm. That’s the commercials you see on tv, “Get your credit score, free credit score…”. Those are a retail algorithm and they’re not very accurate when compared to a commercial credit used in the mortgage industry. Again, I’m not in the credit industry, but credit professionals refer to those as FAKE-O scores. You’ll get a borrower who doesn’t want their credit pulled, and then they say, “Here’s a copy of my credit report,”. This is not a commercial credit report and if you use it to pre-qualify a borrower, you’re taking a risk due to its inaccuracy. “This is a FAKE-O, score, not a FICO score.”
Ultimately, Fair Isaac is saying, “We’re going to make changes to the commercial algorithm.” Let’s see what happens. It could be good, bad or indifferent.