Last month the Consumer Financial Protection Bureau (CFPB) released a report summarizing the discussions and conclusions from an all-day symposium it hosted on the topic of credit accessibility. The event focused on a broad spectrum of ideas and challenges associated with responsibly expanding access to credit to those who are underserved.
Obviously, credit scores are one of those factors. First off, the numbers:
The CFPB noted that based on its prior research that, “roughly 20 percent of the adult population have no credit records or very limited credit records with the three Nationwide Credit Reporting Agencies (NCRAs). As a result, these ‘credit invisible’ and ‘unscoreable’ consumers are unable to fully participate in the credit marketplace. This can limit their ability to withstand financial shocks and achieve financial stability.”
It is important to point out that the number of “conventionally unscoreable” consumers, as we call them, varies depending upon what model is used. We define anyone who is “conventionally unscoreable” as one that fails to meet the minimum scoring criteria of the conventional models widely used by lenders and exclusively used by the mortgage industry. The CFPB used one of these conventional models in its research.
These models require at least six months of credit activity or an update to the credit file within the previous six months.
So in essence, according to these models, if a consumer has been inactive for say, seven months, that consumer is so risky as compared to a consumer that has been inactive for six months, that she/he should face the highest possible interest rates and terms or be declined altogether.
This, as they say, doesn’t pass the smell test. You don’t need an advanced degree in mathematics to conclude that one day after the six-month cut-off you are immediately a super high risk consumer.
The VantageScore model was developed using an approach that can accurately score 40 million more consumers compared to traditional scoring models, helping lenders evaluate a larger pool of consumers in risk and marketing decisions.
|Emerging Borrower/Young File||Young to credit||Consumers that have only tradelines that are fewer than six months in age|
|Dormant||Infrequent or rare users of credit||Consumers that haven’t had an update/reporting on their credit files in the past six months but have had updates more than six months ago|
|No Trades||Have only external collections, public records and inquiries on their file||Consumers that have no credit accounts but are scored based on the external collections and public records on their file|
A demographic breakdown is as follows:
|2018 Unscoreables – All Scores||2018 Unscoreables – Scores 620+|
|Total||40 million||10.06 million|
|Black and Hispanic||12.2 million||2.4 million|
|Asian/Pacific-Islander||1.6 million||<1 million|
|White||25.7 million||7 million|
Having said that, we as an industry need to ensure credit is extended safely and in accordance with sound lending practices. That means the score assigned to each consumer needs to be an accurate portrayal of her/his risk profile, or more to the point, the consumer’s propensity to go into default.
So is the score that the VantageScore 4.0 model assigned to these newly scoreable consumers accurate?
Yes! There is a nearly identical alignment of default rates between those with limited credit histories and those who have conventional credit behaviors in the first year of a new account.
VantageScore 4.0 also provides for a significant predictive performance lift over VantageScore 3.0 across all credit categories. And perhaps most compelling of all, almost 2,500 financial institutions use VantageScore credit scores, with the number growing steadily, providing testament to the strong performance of our models when benchmarked against other competing models available.
The CFPB has aimed a bright spotlight on the challenge and plight of the conventionally unscoreable consumer. We need to get behind their leadership and test, validate and adopt new processes so that the bureau’s leadership isn’t in vain. Moreover, we encourage the CFPB to revisit their study on credit invisibles. The data is now outdated and the marketplace would benefit from a better understanding if other models aside from the conventional models used in the original analysis provide a consumer benefit.
Please read on for some great articles this month. Included are features about why and how lenders upgrade to new scoring models; a helpful back-to-school article with credit health in mind; and our “Five Questions With…” guest is Peter Esparrago, Co-Founder & CEO of Finlocker.