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The unscoreables problem gets worse

Has the plight of the conventionally unscoreable worsened? Unfortunately, based on a recent VantageScore analysis, it has been exacerbated.

As the overall population has increased, so has the number of consumers who are not scoreable when conventional credit scoring models are used. Indeed, we estimate that based on the 2017 U.S. Census, the overall population grew to more than 326 million and the number of conventionally unscoreable consumers (who can now be scored with the VantageScore model) also increased to approximately 40 million.

By contrast, according to the 2010 U.S. Census, the overall population was about 309 million; of which 30 to 35 million were conventionally unscoreable, but could be scored using the VantageScore model.

The proportion of the adult population that is conventionally unscoreable (but can be scored by VantageScore) remains stable at nearly 16 percent. This represents an opportunity to make credit markets more accessible to additional consumers who have been historically underserved.

While this is perhaps an argument for lenders to use more inclusive models such as VantageScore, that is of little solace to the consumers directly (and even adversely) impacted.

Consider this map below of the United States that shows the percentage of consumers within each state who fall into the conventionally unscoreable category but can obtain a score using our latest model. (click on the map to enlarge image)

There are significant pockets across the country, but states located in the South are clearly disproportionately impacted.

Minority borrowers are also deeply affected. Our data shows that approximately 12.2 million African-American and Hispanic consumers are conventionally unscoreable (approximately 2.4 million have scores above 620), and approximately 1.6 million Asian and Pacific Islander consumers are also in this category (with more than 0.5 million with scores above 620).

These consumers, despite the fact that they have relatively low credit risk, face high-interest rates and other potential adverse terms—if they can even access credit at all. Mortgage lenders, when offering loans to Fannie Mae or Freddie Mac, are required to use the same old pre-Great Recession scoring models from FICO, which makes homeownership for these consumers very difficult.

Critical for lenders and their regulators to understand is the predictiveness of the VantageScore credit score for these consumers. Included in this month’s newsletter is a white paper that explores how more modern modeling techniques like machine learning facilitate more accurate risk assessments. It also shares research on how new account payment behavior for unconventional consumers is similar to conventionally scored consumers. To learn more about the study, be sure to check out the article.

Also, as you may have read in the press, last month under the direction of then-director Mel Watt, FHFA published a proposed rule to implement credit score competition in the mortgage market as directed by Congress when it passed Section 310 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155). This legislation was signed into law on March 24, 2018. In reality, however, the language of the proposed rule misreads the intent of the law. In fact, as proposed by the FHFA, it would have the opposite impact, thereby stifling innovation by perpetuating the status quo wherein a single source of supply, FICO, will continue to exploit its government-sanctioned monopoly for years to come without the markets benefiting from competition.

Our press statement is included in the newsletter as well.

To be sure, not only would VantageScore be effectively barred from the industry, but based on how most experts interpret the language, so would virtually every other potential competitor to FICO – big and small.

Plainly stated, we are seeking competition. And the law passed by Congress is intended to bring about just that, giving lenders a choice to use a validated credit scoring model (as required by the law) that could advance their business goals and provide greater sustainable homeownership opportunities for consumers during a time when it’s critically necessary. This potential win-win has been completely lost under FHFA’s leadership.

Make note: This is only a proposed language, and we expect to have the opportunity to more properly structure the rule with the new incoming FHFA director. We look forward to working with you towards that goal.

Regards,

Barrett Burns

FHFA’s proposed rule misreads the law

VantageScore Solutions Issues Statement Reacting to FHFA’s Proposed Rule for Validating and Approving New Credit Scoring Models

Stamford, Conn – VantageScore® Solutions, LLC, the company behind the VantageScore credit scoring models, released today the following statement regarding FHFA’s flawed interpretation of the statutes requiring credit score competition in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018:

Last year, FICO imposed a historic price increase on mortgage borrowers for a scoring model approaching 20 years old. That is the essence of monopolistic behavior and control.

Director Watt’s proposed rule would perpetuate and strengthen that monopoly by ruling all of FICO’s current competitors “ineligible.” Simply put, the language is not reflective of the intention and desire that Congress had when it passed the credit score competition provisions of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

Should the proposed rule stand, the federal government would be picking winners and losers to the detriment of millions of consumers. 

We look forward to providing commentary and working with the new incoming Director of FHFA. We presume that the next Director will share Congress’s desire for a competitive and fair credit scoring market.

For over 12 years, VantageScore has competed on a fair playing field in all loan categories except for the mortgage market. This competition has led to more predictive, more consumer-friendly, and more inclusive credit scoring models.  Those circumstances refute claims that VantageScore Solutions and/or its owners would gain some type of anticompetitive advantage if VantageScore were to be accepted in the mortgage space. 

As VantageScore has stated in the past, the exclusive use of FICO Scores as a gateway to homeownership provides the company a decided competitive advantage. It ensures that FICO has an imprint in almost every depository institution and with almost every institutional investor, regulator, the rating agency, re-seller, and technology vendor. That imprint inhibits competition by raising switching costs and granting the irreplaceable brand value of utter ubiquity. It gives FICO unparalleled and highly controversial negotiating leverage with almost every participant in the industry.

Conventionally unscoreable population grows to 40 million consumers

Conventionally Unscoreable Population Grows to 40 Million Consumers

VantageScore study shows that outdated, conventional scoring models lead to an increase in marginalized consumers facing unfair hardships when applying for credit

VantageScore® Solutions, LLC, the company behind the VantageScore credit scoring models, released the results of an analysis that shows that the population of consumers who are conventionally unscoreable (i.e., those who fail to meet the minimum scoring requirements of widely used conventional credit scoring models) has grown from approximately 30-35 million in 2010 to approximately 40 million in 2018.

Through no fault of their own, these consumers would fail to meet the requirements for automated underwriting processes widely used across the consumer lending system and could either be turned down for loans or face potentially unfair pricing and terms.

To perform the analysis, VantageScore used a random, anonymous sample of 15 million consumer credit files obtained from the three nationwide credit bureaus and calculated the proportions of the consumers that would satisfy conventional model scoring requirements or fall into one of the four groups of conventionally unscoreable consumers – new to market, infrequent credit user, rare credit user or no accounts. The proportions were then applied to the overall US adult population based on 2017 US Census figures to estimate the total population of conventionally unscoreable consumers. Further, leveraging the 2017 American Community Survey published by the US Census Bureau, VantageScore estimated the impact on different ethnicities using zip code level data.  

The analysis shows that based on the 2010 U.S. Census, the overall population was 309 million, of which 30-35 million were unscoreable when conventional models were used by lenders. These consumers could be scored with the VantageScore model.

As the overall U.S. population has increased, so has the number of consumers who cannot be scored by conventional credit scoring models. According to the latest 2017 U.S. Census, the overall population grew to 326 million and the number of conventionally unscoreable consumers who can now be scored with the VantageScore 4.0 model increased to approximately 40 million.

Overall, the proportion of the adult population that is conventionally unscoreable remains unchanged at close to 16 percent.

The ability to safely, soundly and accurately score these consumers represents an opportunity to make credit markets more accessible to additional consumers who have been historically underserved. Despite advances in data availability, granularity and modeling architecture, which in turn have led to the ability to assess risk on a larger pool of consumers, many credit decisions including almost every single mortgage application continue to rely on models that put these consumers at a possible disadvantage.

A breakdown of the conventionally unscoreables consumers that can be scored with the VantageScore model includes:

“New to Market” 

Young to credit, emerging borrower

Consumers who only have credit accounts that are less than 6 months in age

“Infrequent” or “Rare”

Credit users 

 

Dormant credit use

Consumers who haven’t had an update/reporting on their credit files in the past 6 months but have had updates more than 6 months ago

“No Trades”

Have only external collections, public records and inquiries on their file

Consumers who have no tradelines but are scored based on the external collections and public records on their file

The breakdown of the conventionally unscoreable population by ethnicity includes:

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

Native American

335,000

66,000

Below is a map that shows the percentage of consumers within each state who are considered unscoreable (click on the map to enlarge image):



“Using a model that can accurately score a greater proportion of the adult population in the United States can improve a lender’s bottom line, while at the same time, level the playing field for consumers who have been historically marginalized,” said Barrett Burns, president & CEO of VantageScore Solutions. “The borrowers of today and those entering the phase of their lives where accessing credit is critical aren’t behaving as consumers did a decade ago, and to effectively lend to them requires a new approach to credit scoring.”

Introduced in October of 2017, VantageScore 4.0 uniquely uses machine learning techniques in the development of scorecards for consumers who are conventionally unscoreable. VantageScore 4.0 also leverages trended credit data attributes to drive predictive lift and provide greater accuracy in the assessment of a consumer’s creditworthiness.

White paper:
New tech refutes old myths

How do you score approximately 40 million more consumers without lowering risk standards? How do modern data and methodologies facilitate more accuracy, predictiveness and inclusiveness in credit scoring? A new white paper discusses the benefits of using the latest trended credit data and leveraging machine learning to identify “unconventional” users of credit. Read “Anything but Conventional: Leveraging New Modeling Techniques and Better Data to Score Tens of Millions More Consumers with More Predictiveness”, and see how it refutes two myths in the marketplace:

  • Myth 1: Only recent and repeated credit users can be reliably scored.
  • Myth 2: Using modern scoring methodology and data to score consumers creates a “race to the bottom” or lowering of standards.

The results of thorough research and testing showcase the ineffectiveness of using traditional scoring data and methodology to score more unconventional users of credit (e.g., those who are neither recent nor repeated credit users). Specifically, study findings conclude:

  1. There are tens of millions of consumers, including those with relatively low levels of credit risk, who are not scoreable with conventional models.
  2. Given the same credit score, there is no statistically significant difference in default outcomes between conventionally scored consumers and newly scoreable consumers, even though different elements of their credit reports are being utilized.
  3. Newly scoreable consumers do not exhibit different default rates (measured as delinquency of 90 days or more over 24 months) compared to conventionally scored consumers with similar scores.
  4. Further, across all product categories, how quickly a consumer defaults on a new loan is comparable between newly scoreable consumers and conventionally scored consumers with similar scores.

About 40 million unconventional consumers of credit are considered “invisible” to a traditional credit scoring model.* With the use of the latest trended credit data and leveraging machine learning to score more consumers, VantageScore 4.0 provides a more accurate assessment of credit risk for these previously unscoreable consumers, achieving similar prediction accuracy compared to conventional models when measuring credit behavior over the standard 24-month period.

“There has been much speculation about how usage of the latest approaches in credit score modeling will lead to a ‘race to the bottom,’ but the numbers don’t lie. More than 10.5 billion VantageScore credit scores were used last year with over 2,200 lenders using our tried-and-tested models. This is the ultimate litmus test of success,” said Barrett Burns, CEO and president of VantageScore Solutions, LLC. “More fittingly, the reality of this situation should be characterized as a ‘race to the top’ to whom lenders can trust. And we, at VantageScore, are proud to lead the way.”

For more details on the “Anything but Conventional: Leveraging New Modeling Techniques and Better Data to Score Tens of Millions More Consumers with More Predictiveness” white paper, visit: www.VantageScore.com/AnythingButConventionalWP

* The VantageScore 4.0 model allows lenders to accurately assess approximately 40 million more consumers than conventional models.

Why your business credit score matters

By John Ulzheimer, credit expert and author

Every employee these days knows that, when being offered a job, it’s common to have your prospective employer run a background and credit check. Even if the employee isn’t in the cash room counting the day’s take, negative items on a credit report can raise a red flag about the employee’s decision-making skills and degree of responsibility.

But, if you own the business, your credit is a non-issue, right? That’s a common misconception among many new entrepreneurs. Here are some of the ways your credit score, and that of your business (wait, my business has a credit score?), can impact your operations and bottom line, from the credit experts at VantageScore.

How personal credit scores are different than business credit scores
The two scores are not measuring the same thing. Personal credit scores, like VantageScore 4.0, measure the likelihood you’ll fall behind on your bills or have some other negative financial behaviors over a time horizon. Business scoring models are often different and are trying to predict different behaviors. For example, business credit scores commonly predict how many days the business will take to pay. Businesses are also scored using a different scale. Personal scores typically run on a scale from 300 to 850. Generally, if you’re 650 or above, you’re OK. Anything below, and you’ve got work to do. Business scores often don’t have the same scale. They range from zero to 100 in some reporting agencies and from zero to 300 in others.

Why personal credit scores are important to starting up a business
For a new entrepreneur, especially if you’re a sole proprietor, having a strong personal credit score could mean the difference between receiving optimal financing for the business and not getting the best rates. If you get a business loan, your personal score will really be important. It can also help in smaller ways, like getting a cell phone plan for the business without a hefty deposit. Even if you’re a more established business owner, maintaining strong personal credit, along with strong business credit, is important as well. You may need additional funding down the line, or want to buy your own storefront. Strong credit makes the world go round.

Scores like VantageScore 4.0 also use trended credit data, which can indirectly help your business. For example, if you charge significant amounts on your personal credit card for business expenses, but do not pay off those charges in full, you aren’t penalized the same way as with more conventional models.

How to get a business credit score
It doesn’t just happen. You must incorporate, get an Employer Identification Number, and obtain a DUNS number from Dun & Bradstreet. Your Employer Identification Number is one of the keys to business credit and is your credit profile number. You’ll have to begin to have financial, vendor or trade accounts that are reported to one of the many commercial credit reporting agencies.

How to build a strong business credit score
Pay your bills on time, establish vendor credit, keep your debt at a workable level, and have good cash flow and reserves. The longevity of your business also comes into play when calculating its score. For new businesses, the lack of longevity can bedevil their scores, but keep at it. The longer you’re in the black, the better your score will be.

How to monitor it and why it matters
As an individual, you’re allowed one free credit report from the three national credit reporting agencies every 12 months. With business, it’s different. Business owners can monitor their scores by contacting commercial credit reporting agencies and often pay a fee to get their full reports. Do this regularly and look for errors in your business credit reports that could impact business scores.

Hiring employees and credit
When hiring employees, it’s common to do a background and, in some cases, credit check. It’s especially important if the employee will be handling money because impropriety in your cash room or in the till can affect your business adversely, wreak havoc with your bottom line and ultimately affect your business credit score if the theft is so bad it impacts your cash flow or your ability to pay vendors. Credit scores are not included in the employer-requested credit report (and the credit reports can only be obtained with permission from the employee or prospective employee).

Company credit cards
Using a company credit card is a great way to build positive credit for your business. Using your business card for business is a win-win for you because you protect your personal credit and grow your business credit at the same time. But as with personal credit cards, keep your business card’s utilization low.

For additional reading about business credit, here are some resources from the pros at VantageScore.

Disclaimer: The views and opinions expressed in this article are those of the author, John Ulzheimer, and do not necessarily reflect the official policy or position of VantageScore Solutions, LLC.

5 Questions with Wole Coaxum of MoCaFi

Wole C. Coaxum is a Founder and Chief Executive Officer of Mobility Capital Finance, Inc. (“MoCaFi”). MoCaFi is a start-up financial technology company that leverages mobile technologies, data analytics and digital strategies to improve the financial behaviors of underbanked“Feb2018” communities with the goal of moving people away from high cost alternative financial services products, e.g., payday lenders, check cashers, pawn shops, etc., and into the financial mainstream, so communities can live healthy and productive financial lives.

1. Can you explain how MoCaFi works and how it benefits consumers?

MoCaFi is a financial inclusion platform that provides people and communities with access to fair, affordable, wealth building financial services. We believe that a solid financial foundation should be attainable regardless of income, savings, credit history or social status.

A key component of our ecosystem is our proprietary Mobility Score, which rewards people if they ‘Spend Smart, Build Credit and Live Wealthy.’

To achieve our goal we have partnered with organizations like YWCA, United Way, HUD and municipalities across the country to deliver services.

MoCaFi is a mobile financial platform that engages with its members in innovative ways. Through our app, members can enroll in an FDIC-insured bank account and have access to a robust set of features including free transfers, mobile check deposits, and a savings account.

Living Wealthy happens for our members as we create, curate and deliver the best quality educational content, and increase our users’ financial literacy levels.

Just for downloading the app and creating a profile, members get a complimentary 30-minute session with a MoCaFi wealth coach.

We strive to create a lifelong relationship with our members and partner with them in their financial journey.

2. Consumer banking has evolved by creating multiple touchpoints for consumers to engage and establish credit. What strides is MoCaFi making to keep credit top of mind for consumers, so they can build and manage credit?

Building credit is one of our three pillars. It is also one of our core differentiators. Through us members can set up to pay their rent and have those rental payments reported to Equifax, Experian and TransUnion, thereby building credit as those who make mortgage payments do.

We can report rental payments to the Bureaus whether you pay your rent on our platform or any other way.

We are exploring other payments that our members make on a regular basis, like utility payments, that we can report to the credit bureaus.

In addition, we are looking to provide small-dollar loans available to our members at fair prices and with viable terms, such as non-compounding interest and 12-month repayment times, in order to address two things: the chronic shortage of emergency savings, and another way to build credit.

Students, or the 18-24 year group, in particular, by definition have thin to no credit files. We see our ecosystem as a straightforward and fair-priced environment in which people of all kinds can build credit and financial stability.

3. You started MoCaFi in 2015. What makes someone leave the stability of a job in finance to become an entrepreneur?

I was very much a part of the mainstream financial system, working with small businesses and individuals for the last 20-some-odd years. I was fortunate to see the impact that financial services can have in terms of creating jobs and opportunities for individuals and families, but significant numbers of people are outside of the economic mainstream.

What was clear to me is that lots of people understand the issues and can articulate the problems. We know that 1/3 of white Americans make less than $15 an hour, that 3/5 of Hispanic Americans make less than $15 an hour, and that a majority of African Americans make less than $15 an hour. We know that some studies show people spending upwards of $1,200 per year on financial products that are exploitative. Some families spend more on financial products than they spend on food. You look at that and you say, “There must be a better way.”

Given my personal concern about these issues and my training, my knowledge of how the financial services industry works and of how financial services can be delivered, I thought that this would be a good time in my career to think through how I could make an impact.

Most recently, I was at JPMorgan, running sales for Business Banking. We had 2.3 million customers, and I was responsible for 12,000 bankers working with 5,600 branches. We spent a lot of time thinking about how we could use technology to create a better customer experience. I realized that if we can do this for Chase customers, we can do it to address some of these issues for underserved communities across the country.

The other piece that struck me is the number of payday lenders and check cashers we have. They dwarf the number of McDonald’s. When I realized they represent a $140 billion industry, I thought maybe I could impact this conversation.

4. You make note of “living wealthy” in order to practice sound financial habits. It somewhat sounds contradictory, so what does it really mean?

In this context, Living Wealthy is a mindset as much as it is a level of disposable income or consumption capacity. So, they go hand in hand, sound financial habits and wealthy living: one certainly won’t stay wealthy, in the event of inherited wealth, without the right mindset. This is also true at the opposite end of the spectrum: it is near impossible to get where you want to go if you have no map and no guidance on how to get there.

We think about what kind of basic ‘duh’ elements are part of wealthy living, and they are not mysterious or complex. There is the insight that assets are better than debt; that the right life insurance policy is a wise place to start; that whatever the size and value of one’s estate and goods, it is better to have a will (and a living will) than not.

It all starts with education. The more knowledgeable that our members are, the better equipped they are to have a wealthy mindset. Product selection is a natural outgrowth from that.

5 What is a New Year’s goal you’ve set for yourself?

We are looking forward to an exciting 2019. The question that we are often asked is: How can we track how are people using our service? In early 2019 we will make VantageScores available to MoCaFi members for free. This is an exciting next step for us as we help people improve their credit and track the impact. We are committed to driving positive customer outcomes, and adding this capability is a big step forward in that effort.

Bio: Wole Coaxum

Prior to starting MoCaFi in 2015, Wole served as Managing Director at JPMorgan Chase, where he held a series of leadership positions in Business Banking, Card Services, and Treasury & Securities Services.

Prior to joining JPMorgan in 2007, Wole was a senior executive of Willis Towers Watson, where he served as Chief Financial Officer & Chief Operating Officer of Willis North America and Chief Executive Officer of Willis Canada. He started his career at Citigroup working in investment banking, asset management, insurance and corporate functions.

Wole currently serves as a Trustee of Phillips Exeter Academy and a board member of the Roosevelt Institute. His former board participation includes as a member of the board of the Williamstown Theatre Festival, Chairman of the Board for Phoenix House New York and member of the Phoenix House Foundation Board. He is the recipient of the Harlem YMCA – Black Achievers in Industry Award.

He has a Masters of Business Administration degree with a concentration in finance from New York University, a Bachelor of Arts degree with a major in history from Williams College, and studied politics, philosophy and economics at Exeter College, Oxford University.

Wole lives in Westchester County, N.Y., with his wife, Kim, and their two daughters, Quinn and Avery.

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