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THE SCORE
 

We’ve revamped our websites

Dear Colleague:

You’ve probably noticed while reading this edition of The Score that there have been some changes in the webpages that house our newsletter—changes that are especially noticeable to those of you reading from your smartphones or tablets.

The redesigned newsletter pages are part of a broader upgrade of all VantageScore web properties, which have been undertaken to ensure that we continue to communicate effectively with our stakeholders.

Enhancements include: 

  • The sites are fully optimized for all devices and screen sizes. Previous versions of the sites worked with smartphones and tablets but didn’t always provide an ideal user experience. Headlines, menus, and other page elements will now scale more intelligently.
  • The sites’ “look and feel” have been updated and energized, with fresh photography and advanced animation that bring the pages to life without slowing page download times or mobile responsiveness.
  • A new “mega-menu” navigation scheme provides at-a-glance access to the bulk of information offered by each site to promote increased discovery and engagement.
  • Carousel-style resource showcases and dynamic content zones throughout the sites make white papers, videos, infographics, and other materials easier to locate.

All of our websites have been relaunched, including: 

  • VantageScore.com: our corporate/industry website
  • yourVantageScore.com: our consumer education website
  • ReasonCode.org: the search engine-based site that helps consumers and lenders better understand and learn from the reason codes generated by VantageScore scoring models
  • The Score: this monthly newsletter

Please explore the new sites. Let us know what you think, and come back often to see what’s new.

All the best,

Barrett Burns

Insights from a decade of model validations

VantageScore’s arrival in 2006 brought the first meaningful competition to the credit scoring industry and introduced several new best practices, including publication of annual model validation results. Validations test credit scoring models to determine whether they continue to meet performance expectations. Publishing the results of those validations promotes greater transparency in the credit scoring industry and assists financial institutions with model governance.1

After 10 years, VantageScore still remains the only credit scoring model developer that publishes annual validation results. (Competing developers typically validate models only at their inception.) We’ve used our 2016 Validation white paper to report not just our latest findings but also to reflect on trends that emerged over the course of a decade of analysis.

As in years past, the 2016 validation results found VantageScore credit scoring models consistently outperforming in-house models from the three national credit reporting companies (CRCs: Equifax, Experian, and TransUnion) in the performance dimensions that matter most to lenders—predictiveness, universe expansion, and score consistency. Once again, this performance superiority bore out across all three major lending categories: mortgage, auto, and bankcard.

The study further examined how the three VantageScore models (VantageScore 1.0, 2.0, and 3.0) performed during the time period of 2013-2015, as well as over the past years.

“We put the validations process in place to help pinpoint opportunity as risk profiles shift and to introduce transparency into what was an otherwise opaque industry,” said Sarah Davies, VantageScore senior vice president for analytics, product management, and research. “All the VantageScore models surpass competitor models in both normalized and volatile risk periods, demonstrating unparalleled long-term stability.”

The results

VantageScore models are Recession-resistant: Over the last 10 years, the economy has seen both a recession and recovery. For this study, VantageScore validated all its models on consumer originations during the decade’s most volatile risk period, 2007-2009, and compared the results for VantageScore 1.0, which was developed pre-recession (2003-05); VantageScore 2.0, which was developed mid-recession (2007-10); and VantageScore 3.0, which was developed post-recession (2009-12).

It is not surprising that VantageScore 2.0, developed using data from the recession time frame, performed optimally on credit files taken from that period. VantageScore 3.0 performance, however, was also strong, coming within a half Gini-point2 of VantageScore 2.0 for the bankcard, installment, and auto industries. For mortgages, where score performance was most challenged during the recession, the Gini for VantageScore 3.0 (59.3) was within three points of that for VantageScore 2.0 (61.9), while VantageScore 1.0 lagged version 2.0 by nearly nine Gini points (53.2).

With probability of default (PD), shift happens: Although the validation process has shown that all VantageScore credit scoring models were highly effective risk assessment tools during the last 10 years, the risk levels associated with specific score cutoffs have varied over the years.  Analysis of shifts in the probability of default (PD) associated with specific score cutoff values revealed considerable variation over the past decade—and showed that risk levels have finally returned to near pre-recession levels. (This variation in risk levels makes it critical for lenders to regularly and systematically review changes in the risk associated with their score cut-offs and to update policies accordingly to manage risk exposure effectively.)

VantageScore remains best in class: Despite economic instability, VantageScore 3.0, in particular, was shown to deliver superior and stable performance:

  • Predictive power: During the performance period of 2013-2015, VantageScore 3.0 outperformed all CRC models by an average of 1.7%-3.4% in key industries.
  • Consistency across the board: The accuracy of VantageScore 3.0 is also highly consistent across all three CRCs (Experian, Equifax, and TransUnion) with a minimal variance of just .34 Gini points between the CRCs.
  • Universe expansion: VantageScore 3.0 continues to score 30-35 million more consumers than competing credit scoring models, 9.5 million of whom are Hispanic- or African-American consumers.

For more information on the validation process and study results, please visit VantageScore.com/Validation2016

1Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, Supervisory Guidance on Model Risk Management, April 4, 2011: http://www.occ.treas.gov/news-issuances/bulletins/2011/bulletin-2011-12a.pdf.
2The Gini coefficient of a credit score compares the distribution of defaulting consumers with the distribution of nondefaulting consumers across the credit score range. The coefficient has a value of 0 to 100. A value of 0 indicates that defaulting consumers are equally distributed across the entire credit score range. A coefficient value of 100 indicates that the credit score has successfully assigned all defaulting consumers to the lowest score possible. A Gini coefficient of 45 or greater is considered a good result by industry standards. 

Trade-level derogatory entries:
The final chapter

Many kinds of entries on a credit report can lower your credit score, but some are much more harmful than others. The entries that do the most damage and that tend to keep your score down for extended periods of time are what lenders call derogatory events—or just plain bad ones. (For a refresher on credit reports and how they are organized, see our Anatomy of a Credit Report series.)

Lenders view derogatory credit report entries as evidence of mismanaged debt. That is why credit scoring models typically treat them as grounds for steep, long-lasting score reductions. That is also why you should avoid them at all costs. This four-part series of articles is designed to help you “steer clear” of derogatory events, examining them in detail so you know what to avoid—and what the consequences could be if you don’t. We are covering the three categories of information that can be considered derogatory: The first part examined public records; part two looked at credit report narratives, part three and this final installment look at the somewhat complicated topic of non-performing trade lines—a fancy term used to describe accounts that aren’t being paid as agreed upon. 

By John Ulzheimer
The Ulzheimer Group

In this final chapter of our four-part “Steer Clear” series, we’ll examine the codes associated with credit file data that are seldom seen by consumers but are recognized and treated as derogatory by credit scoring systems.

First, some background: Credit report information is shared and reported in a computer language called Metro-2. Like all computer languages, it takes the form of code, which isn’t decipherable to most humans, other than software engineers. Metro-2, which has been around for decades, is less cryptic than some computer languages, and translation is simplified somewhat by the annual publication of a Metro 2 Manual by the Consumer Data Industry Association, an industry trade group. The following is a list of the various codes1 that are often found on credit reports that are considered to be derogatory.

Account status codes: These codes are meant to communicate the current status of an account as of the date it was most recently reported to the credit reporting companies. And while there are many account status codes that are not considered derogatory, the following codes are considered derogatory and may lead to lower credit scores: 

  • Voluntary surrender (this refers to the forfeiture to a creditor of a secured asset such as a car, in lieu of having the asset repossessed)
  • Collection – now paid in full
  • Repossession – now paid in full
  • Charge off – now paid in full
  • Account currently 30, 60, 90, 120, 150, or 180 days late
  • Claim filed with the government for defaulted loan (used most often with defaulted student loans)
  • Forfeiture of deed in lieu of foreclosure
  • Account assigned to internal or external collections

Special comment codes. These codes are meant to add context to the reporting of certain accounts. As with account status codes, there are many special comment codes that are not considered to be derogatory, but the following are considered derogatory and could lead to lower credit scores. These codes are reported as long as the condition applies.

  • Account paid in full for less than the full balance – code used for settlements and mortgage short sales
  • Involuntary repossession – Balance still due and owing
  • Foreclosure process started

Consumer information indicator codes. These codes are meant to communicate a unique condition that applies to the consumer and is only reported on the consumer’s credit file to which it applies. These codes are specific to bankruptcies.

  • Chapter 7, 11, 12, or 13 bankruptcy filed
  • Chapter 7, 11, 12, or 13 bankruptcy discharged
  • Chapter 7, 11, 12, or 13 bankruptcy dismissed
  • Chapter 7, 11, 12, or 13 bankruptcy withdrawn

Past-due balances and collection agency reporting. The last remaining credit report entry that could possibly be considered derogatory would be accounts, of any kind, that have a value in the past-due balance field or accounts that are reported as third-party debt collectors.

Regardless what type of account it is, if an account has a past-due balance of any amount, then it is considered to be a derogatory entry. It is very common for past-due accounts to contain the exact amount that’s currently past due, which in the credit reporting world indicates anything that’s a full 30 days, or more, delinquent. Eventually, when the consumer “cures” the account and brings it up to date, the past-due balance will be removed by the creditor.

Finally, if an account goes into default, the creditor may enlist the assistance of a third-party debt collector to help with the collection of the debt. Debt collectors are allowed to report information to the credit reporting companies. When they do so, their “account numbers” with the credit reporting companies indicate their line of business—collection agency. As such, whenever they report someone to the credit reporting companies, that report clearly shows up as a collection-style account, which is always considered to be a derogatory entry.

1These codes are all reported in either alphabetic or numeric form to the credit reporting companies, but for clarity only the textual representation is being shared above.

Did You Know…how you can earn an almost-perfect credit score?

This month, in place of our standard Did You Know explanation of a credit scoring fact, consumer credit expert John Ulzheimer shares a personal insight about his own credit score and how consumers can learn from it.

After almost 25 years in the consumer credit industry, I’ve finally found myself in rarified air, credit score-wise that is. For three of the past nine months, my VantageScore 3.0 credit score has been a perfect 850. And the months when I was not at 850, my scores were at or above 838. It seems like I’ve finally cracked the secret of maximizing my credit score.

Of course, I haven’t really cracked anything. In fact, I haven’t done anything in the past year that I hadn’t already been doing for the past two decades. I pay my bills on time, all the time. I maintain very low credit card balances relative to my credit limits. And I don’t apply for credit unless I really need to open a new account for some reason.

For all I know, I may have had scores at or near 850 for years, but I just didn’t know it. Only recently has accessing my credit scores become so easy, and free. There are so many lenders and credit-related websites giving away free credit scores that it is easy for all of us to always know where our credit scores stand on any given day. All of these free scores have permitted me to validate the effectiveness of the credit management practices that allowed me to earn and maintain high scores.

You can do exactly what I did. You can choose to forego additional debt. You can choose to make all of your payments on time, and you can certainly refrain from applying for excessive credit. If you’ll do these things, you’ll be well on your way to earning and maintaining elite scores as well.

There are, of course, a few credit scoring metrics that are out of your control. For instance, you will generally earn more credit score points if you’ve got a long credit history than if you have a short one, so if you’re a new user of personal credit, you must simply bide your time. Keep paying your bills on time, and eventually you’ll reap the rewards of an older credit file.

In addition, credit scoring models generally reward diversity in the types of consumers’ loans—for instance, a mix of credit card accounts, auto loans, and perhaps a mortgage account or two. Getting this level of diversity is also often a function of time: Lenders don’t typically issue mortgage loans to new entrants into the credit market, for example. Taking a long view, obtaining new loans in gradual, prudent fashion, and making sure to always pay your bills on time, every month—can help you build a diverse account over time.

The last time I pulled my credit reports I had 22 years of credit experience. I also had a great deal of experience managing both installment loans and revolving accounts, including credit cards and a variety of loans. This appears to have been the last piece of my credit score puzzle. Once my credit reports contained this well-aged and diverse collection of accounts, I was able to earn the additional points to maximize my credit scores.

An interesting thing about credit scores is that it seems to be easier to maintain a really high score than it is to earn one in the first place. Once the metrics that are largely out of individual control have been optimized, focus on proper management of the ones you can control.

At this point, it really is as “simple” as paying my bills on time and doing my best to stay out of a lot of credit card debt. The scores are taking care of themselves, and I’m employing a maintenance strategy rather than an improvement strategy. With time and discipline, you can do so too.

Five Questions with Janet Reilley Hewitt, editor in chief, Mortgage Banking magazine

Janet Reilley HewettFive Questions with Janet Reilley Hewitt, editor in chief, Mortgage Banking magazine

Janet Reilley Hewitt is editor in chief of Mortgage Banking magazine, which is an official publication of the Mortgage Bankers Association and an important source of news, opinions, and analysis for the lending industry. With 32 years on staff at the magazine, Hewitt recently announced plans to retire. She graciously agreed to speak with The Score, and to share some of her decades of insight, amid preparations for her final issues of the publication.

It has been said that “Those who don’t know history are destined to repeat it.” In your 32 years of following and analyzing the industry, what are some historical moments that you think changed the mortgage industry forever?

There are really three things that happened during my tenure that I think changed the industry forever. The first was when national home prices actually turned negative, and there was depreciation on a national average basis for the first time since the Depression. The next thing that changed the industry forever was when Fannie and Freddie were taken into conservatorship. The third thing was when the Congress had to allocate money from the U.S. Treasury to the Federal Housing Administration (FHA) program for its insurance fund.

That first development—national home prices turning negative—I think made mortgage lenders subconsciously turn away from the basic premise that a mortgage was a form of secured loan that was backed by a real asset (a home). That development—that the asset that secured the loan could lose a substantial part of its value—eventually made lenders rely too much on stricter credit underwriting of the borrower, rather than taking into account that the loan was secured by a real recoverable asset. It didn’t help that in many states regulations and the courts made foreclosing on the asset securing the mortgage next to impossible. With that subsequent over-reliance on the credit side of the borrower, and under-reliance on the asset securing the loan, credit conditions became unnecessarily strict and inaccessible for too many Americans. That remains the case today, even though valuation data and analytics are more sophisticated and predictive than ever before.

Fannie/Freddie in conservatorship was just a profound shock to the entire housing finance system. I think it sent a message to some that the federal government should not give too much latitude to those who run the government’s primary sources of housing credit (the GSEs). This has led to micromanagement of the GSEs, and their credit standards and loan programs. The event itself, I think, also convinced some policymakers that homeownership wasn’t the low-risk investment that many had previously believed it to be. And it also led lawmakers to conclude that they needed to write things like QM and ability-to-repay rules into law rather than letting the housing finance experts write the rules.

The need for the FHA capital infusion by the Treasury just fed more mistrust of the government’s housing finance programs in Washington. That, in turn, has led to more micromanagement by nonexperts in Washington who tend to get political when they set housing policy.

Many have credited Mortgage Banking with foreseeing and assessing the credit market meltdown early. What predictions can you make for the market in the decade to come?

One prediction for the market to come is to remind everyone that residential real estate is a supply-and-demand industry. With an unpredictable and large demographic bulge coming (millennials) who may eventually be potential buyers in large numbers, and with a large and aging demographic bulge (baby boomers) likely to be big sellers at some point, those supply and demand issues will come into play. If boomers decide to sell and the millennials (and Gen X buyers) aren’t ready to buy in roughly equal numbers, then prices may take a hit. Also, with institutional investors owning large volumes of single-family rental properties, who is to say that they won’t decide to dump large amounts of inventory all at once, which could also negatively influence prices?

Then there is the whole notion of crowdsourcing capital to buy homes. Just completely out-of-the-box sources for capital to buy houses may lie in the not-too-distant future.

Mortgage Banking magazine will be ending its print run in October, and with that, so ends its need for cover art. What was your favorite cover for the magazine, and why?

Two favorite covers: The one with Ben Bernanke’s photo on the cover because it told the world that we were such a rock star magazine that we could get an exclusive interview with the former Fed chairman (who himself is a rock star). The second-favorite cover was for the October 2005 issue. It shows an up close photo of the moon with a house sitting on it, surrounded by a little garden. The headline was “Uncharted Territory.” This cover appeared well before 2007, when the mortgage market blew up because lending standards had gotten out of control. So that cover proves we saw it coming as early as October 2005.

Of the many people you have interviewed for the magazine, who do you think has made the biggest impact on how you view the industry?

Lots of people I have interviewed have had a big impact on me. I would have to say everyone I interviewed from this industry has helped to teach me what I know. It takes a village, to borrow a phrase. This is a complicated and great industry, but there about as many angles to it as you could ever imagine. I now understand that.

What plans do you have for your retirement?

What will I do in retirement? Absolutely nothing. That’s what pensions are for. I might also play a little golf and travel. Just got back from Ireland, so I think I have the travel bug.

Tenth Anniversary Top 10:
Consumer pages

2016 marks the 10th anniversary of the founding of VantageScore Solutions, LLC. To commemorate that milestone, each 2016 issue of The Score newsletter will include a bonus “Top 10” article. This month, we offer a look at the 10 most popular pages on our consumer website, yourVantageScore.com.

Rank

Page


10

How credit is “scored”


9

What distinguishes our model


8

Understand your score: What do these three numbers say about you?


7

Free score providers


6

Tap our resources: Expert perspectives


5

How to improve your score


4

What Influences your score


3

How to translate reason codes


2

Where to get a credit score


1

How the scores range



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