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Why it’s OK to lower score cut-offs

A June opinion piece in American Banker’s “BankThink” editorial section by VantageScore Solutions President and CEO Barrett Burns has drawn notes of approval from across the industry.

The guest column, headlined “Why It’s Safe for Lenders to Lower Credit Score Minimums,” makes a case that “in an environment in which default risk is small, assuming all other underwriting criteria are met, lenders can safely shift credit score cut-offs downwards from the high levels reached during the housing crisis and its immediate aftermath.”

The article clarifies a common misconception that can lead critics to assume that lowering score cut-offs equates to assuming unacceptable levels of risk:

“A given credit score is not a static representation of a consumer’s risk profile. It is a snapshot of the consumer’s risk profile at the time the score is obtained. … The relationship between a credit score and a borrower’s risk profile changes over time.”

Burns argues that lowering credit score cut-offs is a reasonable response to an environment in which overall risk has reduced. Furthermore, he says lowering cut-offs can be an important step in boosting lenders’ business opportunities and expanding consumer opportunities for homeownership.

As evidence, Burns cites a September 2013 paper, “Opening the Credit Box,” by Jim Parrott, a senior fellow at the Urban Institute and former senior adviser to the National Economic Council, and Mark Zandi, chief economist of Moody’s Analytics.

Parrott and Zandi calculate that lowering credit score cut-offs to pre-recession levels — by reducing them 50 points — would increase the pool of potential mortgage borrowers by more than 12.5 million households.

In the wake of the column’s publication in American Banker, numerous private messages to Burns and VantageScore Solutions have echoed the views of reader “pspradil,” who posted the following comment on the American Banker website:

“Excellent commentary, great analysis on how mortgage companies can grow their business!”

You can read the column here. You may also want to read a related article, published in Mortgage Banking magazine in May, that includes more details of the math behind the argument for lower credit score cut-offs.)

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