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Ford vs. Ferrari and Credit Score Competition

Happy 2020! I hope you enjoyed a festive holiday season.

Over the holidays, I watched the movie Ford vs. Ferrari, a true underdog story about how the Ford Motor Company took on racing leader Ferrari in the 1960s to revolutionize the racing world and elevate the Ford brand. [Full disclosure: I’m a bit of a car nut and, as some of you might know, previously served as executive vice president of Global Risk Management at Ford Motor Credit Company.]

A little history: Back in the 1960s, the Ford Motor Company was a dying brand, chugging out cars that no one was buying. To reinvigorate the brand, Ford tried to buy Ferrari; however, the plan backfired when Ferrari refused to be bought by a company that made “ugly little cars.”

In retaliation, Henry Ford II decided to build his own racing car to compete in the grueling 24-hour Le Mans (the most prestigious race at the time) and against Ferrari – a competition that everyone thought they’d lose, since Ferrari had won the race seven years in a row. However, once Ford tasked Carroll Shelby, a racer-turned-automotive designer (and for whom the Shelby Mustang is named), to custom-build a faster, better-performing race car, Ford did the unthinkable and won three years in a row. In doing so, Ford became a force to be reckoned with.

Shelby’s grandson said the following in a New York Times interview about his grandfather and that first race:

“You can never discount the underdog. If you have the right circumstances and set of people, David can beat Goliath.” 

Okay, so what does this have to do with credit scoring?

Thirteen years ago, when VantageScore first started for the purpose of introducing competition into the marketplace so that more consumers could gain access to mainstream credit, our company was met with similar criticism and doubt. Could we take on an industry dominated by one “Goliath”? Could we make a better credit scoring model? In time and with the right team in place, we proved to be a formidable competitor that was indeed capable of building the most advanced credit scoring model in the industry, under what seemed insurmountable odds – without compromising accuracy.

But we didn’t stop there. To this day, we continue to advance our industry, and we remain steadfast and resolute toward that mission.

A testament to this effort is a quick recap of our 2019 “wins”:

  • VantageScore credit score market adoption climbed to 12.3 BILLION, a close second (and closing in!) to FICO’s usage and a consecutive 20% increase each year since 2015. 2,500 organizations now use VantageScore, including 2,200 financial institutions.
  • After years of working closely with policy-makers, market participants and consumer activists, VantageScore earned a seat at the table in the mortgage market thanks to a ruling by the FHFA that requires GSEs (Fannie and Freddie) to allow credit score competition in the mortgage market.
  • As you will see in one of this newsletter’s articles, we covered major ground with consumers via successful social media engagement efforts that put us in the lead in terms of Facebook followers amongst comparable companies, and a newly minted premier partnership with LendingTree.com that already has garnered hundreds of thousands of views on YouTube.

As you can see, a lot can happen in a year. And as we embark on this new decade, our goal at VantageScore is to maintain this momentum, shift into high gear and continue to prove skeptics wrong.

Barrett Burns

CEO and President, VantageScore Solutions

Your personal information:
A closer look

Personally Identifiable Information (PII) refers to pieces of information that, individually or taken together, would be sufficient to locate, contact, or identify a single individual.

PII is linked to specific individuals through direct or indirect identifiers. Direct identifiers enable the identification of an individual without any additional information. Examples of direct identifiers include driver’s license numbers, passport numbers, Social Security numbers, biometric records, or financial account numbers.

Indirect identifiers enable the identification of individuals when coupled with other data. Examples of indirect identifiers include street address without a city, the last four digits of a Social Security number, or birth date.

In pursuit of its business objectives, VantageScore DOES NOT request, receive or archive any PII related to the consumer records used in modeling, research and analysis or other activity. All PII is removed from any data prior to delivery to VantageScore by the credit reporting companies (CRC) or any other third-party data providers – a major differentiator between VantageScore and others in the industry who face data security and privacy challenges because of the PII they collect and store.

VantageScore considers the following to be PII:

  • Name: full name, maiden name, mother’s maiden name, or alias
  • Personal identification numbers: Social Security number (SSN), passport number, driver’s license number, taxpayer identification number, patient identification number, financial account number, or credit card number
  • Personal address information: street address, or email address
  • Personal telephone numbers
  • Personal characteristics: photographic images, fingerprints, or other biometric data (retina scans, voice signatures, facial geometry)
  • Information identifying personally owned property: VIN number or title number
  • Technology asset information: Internet Protocol (IP) or Media Access Control (MAC) addresses that consistently link to a particular person

The following examples on their own do not constitute PII as more than one person could share these traits. However, when linked or linkable to one of the above examples, the following could be used to identify a specific person:

  • Date of birth
  • Place of birth
  • Business telephone number
  • Business mailing or email address
  • Race
  • Religion
  • Geographical indicators
  • Employment information
  • Medical information
  • Education information
  • Financial information

Therefore, care must be given in the use of any information containing the above elements.

Here again, VantageScore does not request, receive or archive personal information such as date and place of birth, race, gender, business contact information, employment, educational or medical information. Further, VantageScore strictly does not include any of these elements of personal information in its modeling, research or analysis. Any geographic identifiers used are at a sufficiently aggregate level (such as zip code or Metropolitan Statistical Area) and are used only in geography-level comparative analysis.

Our new partnership with LendingTree.com

VantageScore is proud to share a new partnership with LendingTree.com in promoting its new credit monitoring app, which features a free VantageScore 3.0 credit score for consumers. The partnership is multiphased and multi-faceted, starting with a YouTube campaign that features a video, explaining why LendingTree chose VantageScore. You can view the various videos below:

:30-sec spot

:15-sec spot#1

:15-sec spot #2

3-min. spot:

Additionally, VantageScore’s very own Jeff Richardson (Senior Vice President, Marketing Communications) also was featured on Cheddar TV, a financial news network that caters to Millennials. View the segment here.

To learn more and/or sign up for the app, visit LendingTree.com.

Credit scoring in the mortgage market: a new ball game

American Banker

Content sponsored by Partner Insights by VantageScore

A little-known secret in lending circles is that unlike in any other consumer loan category, nearly every single consumer mortgage loan requires a credit score that was built on data from prior to the turn of the century. To this day, what many consider an outdated version of the FICO score enjoys a government-sanctioned monopoly for applications submitted to the Fannie Mae and Freddie Mac automated underwriting systems, which, for all practical purposes, set the standard for the mortgage industry

But thanks to a new rule issued by the Federal Housing Finance Agency (FHFA), that is about to change.

In August 2019 the FHFA, which acts as the regulator and the conservator for both Fannie Mae and Freddie Mac (also known as Government Sponsored Enterprises, or GSEs), issued a final rule to address the lack of credit score model competition in the mortgage market. The new rule requires the GSEs to put in place a process by which newer and more predictive and inclusive scoring models can be considered.

Establishing competition in the mortgage marketplace is the proverbial win-win. More creditworthy borrowers become eligible for mainstream credit can achieve the American Dream of sustainable homeownership, and lenders have an unprecedented growth opportunity. And by establishing a process by which new models can be tested and adopted, the mortgage industry will be able to keep pace with changing consumer behaviors and adopt the models that are most suitable for the time period in which they are used.

The introduction of more sophisticated reporting and data analysis techniques has ushered in a new era of credit scoring, bridging the gap between access to mainstream credit and those consumers with limited credit histories, who can be accurately scored with a more advanced credit scoring model. To be more specific, there are 40 million consumers, of whom 10 million are creditworthy enough to be eligible for a mortgage, using more modern credit scoring methodology alone. And of these consumers, 2.4 million are African-American and Hispanic consumers.

This is extremely important because U.S. households are becoming more racially diverse. In fact, the minority share of U.S. households is projected to rise from 34 percent in 2018, to 37 percent in 2028, and to 41 percent in 2038, according to the State of the Nation’s Housing 2019 Report by the Joint Center for Housing Studies of Harvard University. Moreover, the Urban Institute expects that in the next 10 years, minorities (i.e., African-Americans, Hispanics, among other groups) will account for 90 percent of new household formations.

One new model that allows lenders to accurately assess millions more consumers is VantageScore 4.0. Phil Bracken, VantageScore’s Managing Director of Government and Mortgage Industry Relations, explains how their model may help transform the mortgage industry under FHFA’s new rule.

“From a credit score perspective, we know we can score a lot more people. Many of those would be of the demographics that are in that tsunami of changing demographics coming at us. That’s why it is so important, from a public policy standpoint, to have competition in credit scoring and allow mortgage lenders and others to advance this opportunity for those qualified consumers,” Bracken said.

Unlike conventional credit scoring models, which typically contain model attributes that incorporate only one or two dimensions of behavioral credit data, VantageScore 4.0 leverages machine learning techniques to develop multidimensional attributes for consumers with limited credit histories. With an eye toward explainability and transparency, all these attributes once developed remain static so that easy-to-understand reason codes can be assigned.

VantageScore 4.0 also leverages trended credit data, which goes back up to two years to reveal patterns in credit behaviors, such as the number of loan balance increases/decreases over time or growth/decline in borrower’s utilization versus a point-in-time snapshot. The new insights drive predictiveness and allow those without the benefit of deep and diverse credit histories – namely Millennials and Generation Z – to have more accurate credit scores that are reflective of their relative risk.

Since emerging on the scene in 2006, VantageScore has enjoyed increased adoption. According to global management consultant Oliver Wyman, in the 12-month period between July 1, 2018 and June 30, 2019, approximately 12.3 billion VantageScore credit scores were used by more than 2,500 users. This is approximately a 20% increase in the number of scores versus the prior year.

So now that the rule is final, what comes next?

In general, credit scoring models that respond to yet-to-be released “solicitations” from Fannie Mae and Freddie Mac will be evaluated on the model’s integrity, reliability, accuracy, historical record of measuring and predicting borrower credit behaviors (such as default rates), among other measurement criteria.

The final rule defines a four-phase process for GSEs to validate and approve credit score models. The process begins with the Credit Score Solicitation, which is a solicitation by GSEs of applications from credit score model developers. This is followed by the Submission and Initial Review of Applications phase, which is an initial review by GSEs of the submitted applications. The third phase is a Credit Score Assessment by the Enterprise, which is a detailed evaluation of the accuracy, reliability and integrity of a credit score. The fourth phase is an Enterprise Business Assessment, which is an evaluation of the potential impact of using the credit score model within the GSEs’ proprietary business systems and processes.

As stated in the final rule, FHFA expects GSEs will “evaluate applications received in response to the initial Credit Score Solicitation and may submit to FHFA a proposed determination to approve one or more of those credit score models for use, either to replace Classic FICO or in addition to Classic FICO.”

FHFA anticipates the process of approving alternative credit score models will take as many as 26 to 28 months, and the forecast for “industry adoption” is somewhere between December 2022 and June 2023. A more detailed description of FHFA’s timeline follows this article.

“We are extremely excited about this, not just because we believe that the VantageScore model is a great risk management tool, and that we can score more people and can get more people fair and responsible access, but because this is an opportunity for constituents,” said Bracken. “This changing demographic is quickly evolving, and the need for homeownership in America has never been greater. It has never been more compelling for constituents who need and deserve to be served.”

To learn more about the new FHFA-issued rule and a pilot program using VantageScore, visit www.vantagescore.com/GSEnext.

5 Questions with MBA’s Bob Broeksmit

Robert (Bob) Broeksmit is president and CEO of the Mortgage Bankers Association (MBA). Bob is a senior finance executive and corporate officer with a 33-year career in the mortgage sector. He has directed all aspects of lending activities, including marketing, sales, operations, secondary marketing, loan servicing, and default management.  He has also served as a mortgage underwriting expert testifying on many large, high-profile cases.   

Prior to joining MBA in 2018, Bob served as president and chief operating officer with Treliant, heading the firm’s mortgage litigation support practice and serving diverse financial services clientele including large banks, independent mortgage lenders, community banks, credit unions, and service providers to the mortgage industry.  

Bob has served as the chairman of the Mortgage Bankers Association’s Residential Board of Governors and as a member of its Board of Directors.  Firms under his leadership have garnered multiple awards for servicing operations excellence, including Freddie Mac’s Tier One and Hall of Fame designations. He is a Certified Mortgage Banker (CMB) and a graduate of Yale University.

1. It’s been about a year since you joined MBA as its president and CEO. One of your goals was to meet as many MBA members as possible and bring their ideas and issues back to the organization to help strategize on their behalves. What did you find to be some of your members’ biggest policy-related issues?

When beginning my tenure as MBA’s CEO, I embraced the role of being a “servant leader.” I made it my mission to travel outside the Beltway and meet with as many MBA members as possible. Meeting with our members has been the most important task that I have undertaken, and I am grateful to gain their trust as well as their input on pressing industry matters.

While traveling, I learned that there are several policy issues that MBA members are most concerned about. Not surprisingly, one of the biggest issues was housing finance reform – FHA and the future of Fannie Mae and Freddie Mac. The administration recently released its housing finance reform reports from HUD and Treasury. Both reports included several MBA recommendations, such as:

  • protecting taxpayers from future bailouts;
  • establishing an explicit government guarantee on qualified mortgage-backed securities for single-family and multifamily loans; and
  • ensuring a level playing field for lenders of all sizes and business models.

We will be actively engaged with all regulators and stakeholders as the future of Fannie, Freddie, and the overall secondary mortgage market is determined.

We also take seriously the relationship Independent Mortgage Bankers (IMBs) maintain both with regulators and government entities such as Ginnie Mae. In fact, we continuously work with FHFA, HUD, and Ginnie Mae to protect this critical market segment. IMBs have unique concerns, and I have made it my mission to hear what those issues are and ensure that the entire MBA staff is working to ensure that IMBs’ views are being reflected in everything we do.

2. If you could look back at the day you first started, what aspirational goals are you happy to see come to fruition? What are some goals you continue to drive toward for the new year?

Over the past year, I have learned what matters to our members, and I am proud of the direction in which the industry is headed.

This past June, MBA launched its new affordable housing initiative, which will help develop stronger and more effective affordable housing partnerships in both the policy and business arenas. As part of that initiative, we established two affordable housing advisory councils – one for homeownership and one for affordable rental – that will bring together some of the brightest minds in our industry to help shape our work in the space. In the coming year, I am looking forward to seeing this initiative expand as well as growing our partnerships with other affordable housing advocates.

Another significant milestone that occurred this year was MBA making a $2 million investment in the mortgage industry’s standards organization (MISMO). This move is designed to enable MISMO to expand its resources in support of key initiatives, such as a uniform data set for private-label mortgage-backed securities, a standardized closing instructions template, harmonized remote online notary (RON) standards, common standards to encourage business-to-consumer communications on smartphones and tablets, and appraisal and rent roll standards for commercial and multifamily lenders.

It’s impossible to overstate the importance of focusing on trends in the technology space and how they impact the future of companies and the industry as whole. Today’s customers are demanding a digital mortgage process, and we need to have MISMO there to ensure that all the parts and pieces will work together.

And finally, in the new year, I will continue to prioritize listening to MBA’s members in order to make sure that MBA is working on the right issues at the right times for the right reasons.

3. Last year’s MBA Annual Convention was one of its highest-attended ever. What do you think caused this increase in attendance, and what were the topics of most interest to your attendees this year?  

When planning a successful conference, you always think about location. We felt that Austin was a terrific place to host our Annual Convention due to its vibrant and welcoming culture as well as its growing status as a technology and innovation hub. Our members responded well to this atmosphere, and we hope to replicate that energy throughout our 2020 MBA conference season.

In addition to the location, we had a strong lineup of speakers whom our members were eager to hear from because of the outsized impact they have on the mortgage business. I’m referring to FHFA Director Mark Calabria, HUD Secretary Ben Carson, Fannie Mae’s Hugh Frater, and Freddie Mac’s David Brickman. They came to our conference to tell our members about what they were seeing and what they plan to do. I can’t think of four people who have a bigger impact on the mortgage lending business.

We also had compelling non-industry speakers, including an entertaining dialogue between former Governors Chris Christie and Terry McAuliffe, who offered their insight on current political hot topics and the upcoming election cycle, and the life lessons of General William McRaven and women’s soccer star Carli Lloyd.

In general, MBA strives to include relevant content that our members can benefit from as well as provide information that they can take back to their organizations that will boost their operational success. And having Grammy Award-winning musicians like Keith Urban doesn’t hurt, either – he really brought down the house.

4. The Fed recently slashed rates, but many economists are saying that low interest rates are not the only obstacle consumers face when trying to obtain a mortgage loan. What do you consider some other pain points that are holding back the housing market? And what can be done to fix them?

Low borrowing costs have been a predominant theme of the housing market for the last few years. Unfortunately, it’s not been enough to get housing market activity to the level where we think it should be. The issue we are really focusing on is the lack of affordable housing options, particularly for first-time home buyers and low-to-moderate-income borrowers. Insufficient construction in many markets has led to a shortage in supply, and that has been driving prices up faster than wage growth. The result is, even with rates around 4 percent, it’s just too expensive for some Millennials to get into the market or Generation X to find the right move-up home.

As I mentioned earlier, that’s why this past June, MBA launched a new strategic initiative to help develop stronger and more effective affordable housing partnerships in both the policy and business arenas. Our objective with these partnerships is to promote more sustainable, affordable homes for purchase and rent. We’re also an active participant in the White House Council on Eliminating Barriers to Affordable Housing Development.

Lot availability and prices, labor shortages, and restrictive zoning are among the many obstacles impeding home builders’ ability to increase the supply of new homes. As the trade association representing the full breadth and depth of the mortgage lending community, MBA will be the leader in finding innovative solutions to improve housing options for those looking to enjoy the many personal and financial benefits homeownership provides.

5. You grew up in Illinois with five other siblings. What was your parents’ strategy in buying a home in Illinois to accommodate all of you? What financial lessons did you learn from them?

My father was a minister, so I grew up in a parsonage, a house owned by the church. My parents had bought a home earlier, and they held onto it as a rental property, both so they could enjoy the benefits of home price appreciation and have a home for retirement. The equity they built over decades of homeownership was the major component of their “nest egg.”

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