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)
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.