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Brick-by-Brick

More than any time in our company’s history, culture matters. Creating an environment that breeds creativity, innovation and openness is incredibly important to me even in the best of circumstances. When all your team members are working remotely, balancing the stresses of daily life during an unprecedented pandemic, and yes, even trying to take that summer vacation for that important down time, while sustaining the culture you envision becomes even more important to nurture.

I’m often asked about this topic and what sets VantageScore apart. This came up in a Q&A that I participated in that was published by FT Partners, which industry insiders know is the only investment bank that caters exclusively to the Fintech industry.

Previous interviewees have included Nigel Morris, Managing Partner & Co-Founder of the venture capital firm QED Investors and one of the founders of CapitalOne, and Adrian Nazari, founder and CEO of Credit Sesame, among many others. Certainly, I am in good company!

First of all, there is a great one-slide overview of who VantageScore is, where our model is used and how we’ve grown. Then there’s some questions I thought were really well thought out. I’ve excerpted some of them below. And you can read the entire interview here.

Excerpts:

What was the vision behind founding VantageScore Solutions?

Prior to 2006, one credit score model developer dominated the marketplace.  But we all know that competition makes markets more efficient and spurs on innovation and creativity.

And so with those truisms in mind, a group of data scientists from Equifax, Experian, and Transunion went to work on the first VantageScore model. They listened intently to their customers and built the model with three goals in mind: 

  • Make credit scores more consistent across the three CRCs
  • Score more people and improve consumers’ access to sustainable credit
  • Achieve the highest predictive performance possible

 While the marketplace and technology have changed significantly since then, we’ve always kept those goals top of mind when building new models.

Who are you direct customers and how does your economic model work?

Our business model is very unconventional. We don’t have customers. Rather, we license our models to Equifax, Experian and TransUnion, our three owners. They generate credit scores using their respective credit data, and sell the resulting scores to their customers.

We understand that their customers run the full spectrum of lender types. Large banks, smaller credit unions, credit card issuers, auto lenders, and fintech lenders are all users of our models.

A study conducted by Oliver Wyman, a management consulting firm, found that 12.3 billion VantageScore credit scores were used in the 12-month period between June 2018 and June 2019. Since June 2015, VantageScore usage has a 20% CAGR (compounded annual growth rate). You can read the full report on our website.

How is VantageScore different from FICO? Are your scores typically used on a standalone basis or in conjunction with other scores? What makes your scores so compelling?

We have a different model design than other model developers. As a result, our model can accurately and predictively score 40 million more consumers than other models. Using our model can help lenders get an early read on consumers that they might want to add to their portfolios. Two examples:

We’ve found that 24 million of those otherwise unscoreable consumers are infrequent users of credit (i.e., haven’t had credit activity within the last 6 months). However, many of these consumers will go in and out of the credit market – within 2 years, 16% of these consumers will have opened a new account.

We’ve also found that 1 million of the otherwise unscoreable consumers are new to credit (i.e., their oldest credit account is less than 6 months old). Within 2 years, nearly 60% of these consumers will open a new account.

About 10 million of the previously unscoreable consumers have credit scores above 620. We’ve also found that 2.4 million of these consumers are African-American or Hispanic.

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

Do you believe consumers are well equipped to understand their credit scores and know what steps to take to improve them? Are there any common mistakes you see consumers making? What is typically the best way for someone to improve their score?

Consumers still have a ways to go in understanding their credit scores. We conduct an annual survey that measures consumer knowledge of credit scores. Last year’s survey indicated that basic understanding of many of the fundamentals of credit scoring is declining.

We all collectively need to do a better job educating consumers about credit scores, which is why I am thankful to all the innovators out there who are providing consumers with their VantageScore credit scores for free, together with other critical resources and tools to provide the correct informational context.

Moreover, a recent study by Javelin, indicated that more than one-third of the subprime consumers (34%) who monitored their credit score between March 2018 and March 2019 were able to increase their score to a near prime or above credit risk tier.

In order to improve a credit score, it first starts with knowing your score. The next step would be to educate yourself using the reliable  credit information available out there, so you can make informed decisions about how to manage your credit properly and also how to side-step common credit mistakes.

I am proud of the educational materials we share with lenders and other institutions. One of the cool things we did last year was to work with the Wall Street Journal to develop “The Credit Score Game,” which is featured on wsj.com. Tools like these, that gamify credit scoring, are really helpful to explain how certain financial decisions made by consumers can impact their credit score.

 

Please do read the rest of the interview if you have time. Additional questions relate to what other types of data could be used to develop credit score models and the challenges associated with being owned by three competitors in Equifax, Experian and TransUnion.

Lastly, as I write this, we’re seeing an unfortunate resurgence in COVID-19 cases. Nearly all our fall and likely winter meetings and conferences have either been cancelled or will be conducted virtually. I am saddened to see this, and I hope and pray we can all get back to some level of normalcy soon. I very much miss seeing all my friends and colleagues “out on the road.”

Until such time, please be safe and wishing you a healthy and happy summer.

Regards,

Barrett Burns

CEO and President, VantageScore Solutions

The Path to a Free Credit Score Online

By John Ulzheimer

Ever since 2003 American consumers have enjoyed the right to obtain or “pull” a copy of their credit reports from any of the credit reporting companies once every 12 months at no cost. The process, which can be completed online at www.annualcreditreport.com, takes a couple of minutes and is fairly simple. You enter a few identification fields, answer some authentication questions and a few seconds later you’re taking a look at your free annual credit reports.

Consumers also have the option of signing up to become registered users of a variety of websites and also gain access to their credit report information. Most, if not all, of these websites will provide you with even more frequent access to free credit reports than what you’re entitled to as a consumer right. These websites, often informally referred to as “freemium” sites, include companies like CreditKarma, Nerdwallet, LendingTree, and others.

Behind the Scenes of Your Credit Reports

The credit reports disclosed to you from any of these websites are the product of a series of events that took place long before you ever thought about checking your credit reports. That’s the purpose of this month’s article for The Score; to explore the chronology of events that take place leading to your having access to your credit reports from a 3rd party website. 

Step One – You Apply for and Establish Credit

You are not born with a credit report. It has to be created. And in most cases your credit report is created the first time you apply for credit. This creates what’s referred to as an inquiry-only credit report.

Assuming that first application was successful and you were approved, then you will have opened some type of credit related account, perhaps a credit card. This step is important because in order for anyone to have a meaningful credit report they need to have had some form of credit history in order to populate the report. This can include a mortgage, credit cards, student loans, or auto loans. These are the common forms of credit that appear on consumer credit reports.

The more you apply for credit and the longer you use credit the more voluminous the data on your credit reports. These reports will become the basis upon which your credit scores are calculated and lending decisions are made for the better part of your life.

Step Two – The Furnishing Process 

Now that you have credit, your experience with the creditor has to make its way to the credit reporting companies. This process is referred to as data-furnishing. Your lenders are referred to as data-furnishers.

Each month your information is furnished or reported to the credit reporting companies. The more credit you have or have had, the more information is furnished to the credit reporting companies.

This information is placed in the credit file systems of the credit reporting companies and is used to compile your credit reports if and when you apply for credit or want to see a copy of your own credit reports.

Step Three – Sharing Your Credit Reports With a 3rd Party

Step three can actually split into two different directions, one direction for lenders and one for consumers.

Lenders: If a lender wants to use your credit report for underwriting or marketing, they work through their credit reporting company vendor to procure or pull your credit report. This is done through the credit inquiry process and can only occur if the lender has what’s referred to as Permissible Purpose. Permissible Purpose is a term that appears in the Fair Credit Reporting Act and defines what is a legal reason for a credit reporting company to share your report with a 3rd party.

Consumers: Because consumers have a Permissible Purpose to access their own credit reports, they can either make that request directly with any or all of the credit reporting companies, or through a 3rd party website. The website that was created by the credit reporting industry to provide consumers with their free annual credit reports is the aforementioned www.annualcreditreport.com.

If consumers want to become registered users of some of these websites they will be able to access their credit reports, and scores, via that site at no cost. Because the report that’s being provided is designed for only consumer consumption and is not being delivered to a lender, this is commonly referred to as a consumer disclosure style credit report.

The information provided to lenders and consumers is similar, but not exactly the same. The primary differences include the cosmetics of the report style and the wording and explanation of the information.

For example, credit reports used by lenders are in a format/language called Metro 2. Metro 2 is a series of alphanumeric characters. As such, it wouldn’t make sense to provide that report to a consumer because they wouldn’t be able to understand it. The reports provided to consumers are easy to read, often color-coded, and include legends to explain the information.

The sharing of the information with either a consumer or a lender is the final step in the disclosing process. This process, which can occur many times each year, is almost always free for a consumer. There is no charge for claiming your annual credit reports and the various 3rd party websites do not charge their registered users for their credit report information. As such, consumers would do well to claim their credit reports, from one or more sources, as often as they can.

The views and opinions expressed in this article are those of the author (credit expert John Ulzheimer) and not necessarily those of VantageScore Solutions, LLC.

Financial Product Could Help Consumers Build Credit

The Consumer Financial Protection Bureau (Bureau) today released a report indicating that a credit builder loan could increase the likelihood of establishing a credit record for consumers without one, and could help improve the credit scores of those with no current outstanding debt.  The Bureau issued “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation” and an accompanying practitioner’s guide to broaden insight for community-based organizations and financial institutions working toward expanding financial inclusion.

The report, being released during Consumer Financial Protection Week, July 13-17, examines 1,531 credit union members who were offered a financial institution’s credit builder loan (CBL).  Among the highlights:

  • For participants without an existing loan, opening a CBL increased their likelihood of having a credit score by 24%. Almost all participants with existing debt already had a credit score, so the CBL had minimal effect on their likelihood of having score.
  • Participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt.
  • The CBL was associated with an average increase in participants’ savings balances of $253.

Bureau research has found that approximately 26 million U.S. adults, one in 10, lack a credit record and are “credit invisible.”  Another 19 million Americans have a credit record but no score because their history is too thin or out-of-date.  Without a credit score consumers may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products.

The terms of credit builder loans (CBL) vary across financial institutions, but the central feature is the requirement that the borrower makes payments before receiving funds – opposite of more traditional loans.  When a borrower opens a CBL, the lender moves its own funds, generally $300 to $1,000 into a locked escrow account. The borrower makes payments, including interest and fees, in installments typically over a period of 6 to 24 months.  These payments appear on the borrower’s credit report.

Other findings of the study, of which enrollment took place from September 2014 through February 2015, indicate that the CBL appeared to cause a decrease in scores for participants with existing debt; and on average, those with existing loans saw their scores decrease slightly, suggesting that these consumers had difficulty incorporating CBL payments into existing payment obligations.  The report suggests that financial counseling could be provided, either before a consumer opens a CBL or while they are making CBL repayments.

About 82 percent of participants entered the study with a credit score.  Among participants who entered the study with a score, the average score was a subprime 560; nationally, the average score was just under 700 at the time of the study.  Sixty-two percent of participants had annual household income under $30,000.  The majority of participants were female, nearly 90 percent were African American, the average age was 43, and about one in four had a college degree.

The credit builder loan study can be found here: https://files.consumerfinance.gov/f/documents/cfpb_targeting-credit-builder-loans_report_2020-07.pdf

The practitioner’s report can be found here: https://files.consumerfinance.gov/f/documents/cfpb_targeting-credit-builder-loans_practitioner_guide_2020-07.pdf

Research on credit builder loans, can be found here: https://www.consumerfinance.gov/data-research/research-reports/targeting-credit-builder-loans/

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations, by making rules more effective, by consistently enforcing federal consumer financial law, and by empowering consumers to take more control over their economic lives.  For more information, visit consumerfinance.gov.

5 Questions with Michael Fratantoni

Michael Fratantoni is MBA’s Chief Economist and Senior Vice President of Research and Industry Technology. In this role, he is responsible for overseeing MBA’s industry surveys, benchmarking studies, economic and mortgage originations forecasts, industry technology efforts, and policy development research for both single-family and commercial/multifamily markets. Additionally, Fratantoni is president and member of the Board of Directors of MISMO and serves on the CSP’s Industry Advisory Group and the membership committee of MERS.

Prior to joining MBA, Fratantoni worked in the industry in risk management and senior economist roles at Washington Mutual and Fannie Mae.  He received a Ph.D. in economics from Johns Hopkins University and a B.A. in economics from The College of William and Mary, and has served as an adjunct professor at the University of Washington, and Johns Hopkins, George Washington, and Georgetown Universities.

1. How have your projections about owner-occupant home purchases and refinance volume shifted as we’ve moved through the COVID-19 pandemic and its economic impact?

At the onset of the COVID-19 pandemic, there were fears that the housing market would be severely impacted by the sudden and massive jump in unemployment. The economy is not out of the woods yet, but as states have reopened and people have gotten back to work, the outlook looks better. Due to record-low mortgage rates and rising home purchase and refinance applications, we’re now forecasting for 2020 to be the strongest year in total originations ($2.65 trillion) since 2006 ($2.73 trillion). The purchase market rebounded more quickly than we had forecasted, and purchase application volume remains quite strong.  It is not surprising that refinance volume is robust given the level of mortgage rates, but we are seeing substantial week to week volatility – even small changes in mortgage rates are leading to large swing in refi application activity.

Our biggest concerns for the remainder of the year are the incredibly low levels of inventories of homes on the market, and the surge in coronavirus cases which threatens the possibility of more shutdowns and a slowing or even reversal of these gains.   

2. For the past few months, there has been an increase in loans in forbearance and other “distress situations”. Now that the country is “opening up,” do you expect the rate of these requests to turn around? 

As shown in our recent Forbearance and Call Volume Surveys, we have seen the number of loans in forbearance continue to decrease for three weeks in a row as homeowners begin to return to work and have the ability to cancel forbearance plans. As the country continues to gradually reopen, the rate of homeowners exiting forbearance plans will likely continue, but I am worried about what happens when enhanced unemployment insurance benefits lapse at the end of July. These benefits have been incredibly beneficial in supporting households through this crisis. Beyond that, until there is a vaccine or several effective treatments, there’s always the threat that the pandemic could lead to shutdowns in “hotspots” around the country, which would then cause job loss and hardships for some homeowners.

3. MBA’s Weekly Application Survey – a pulse for housing and finance activity in the industry – has been around since 1990. What trends do you see from the past re-surfacing this year? Based off this survey, what do you expect to occur in months ahead?

Based on our recent Weekly Application Survey releases, we are seeing that purchase and refinance applications continue to significantly outperform activity from previous years. While the COVID-19 pandemic has impacted the housing market and, of course, the overall economy, we expect that record-low mortgage rates and substantial demand from millennial households will fuel homebuyer demand in the months ahead. Mortgage bankers have shown an amazing ability through this crisis to overcome any number of operational challenges (VOEs, appraisals, closings, etc.) with the help of flexibilities provided by the GSEs and government agencies. It will be interesting to see how many of these operational changes persist after this crisis has passed.

4. Much has been written about the decline in the Black Homeownership rate in America. Congress has taken macro economic action, providing a base of “sustenance” for consumers (and to a certain extent – Mortgage Servicers) affected by the COVID-19 pandemic. Do you think Congress should consider a major “stimulus” package to jump start opportunity in the low-to-moderate income communities- especially the underserved diverse segment communities of America?  

The homeownership gap has been a stubbornly persistent reality for decades, but there is renewed energy to focus on this challenge. The mortgage industry is in a unique position to effect change and serve low-to-moderate income and minority communities. Mortgage lenders are an integral player in making the American dream of homeownership available, and we must play a role in eliminating racial inequality in our country.

MBA has committed to work with our members to develop affordable housing solutions to help minorities and underserved communities. Last June, MBA launched its Affordable Housing Initiative, aiming to develop housing partnerships in both the policy and business arenas. The initiative, led by MBA’s Steve O’Connor, promotes more sustainable, affordable homes for purchase and rental for underserved people and communities, especially minorities and low-to-moderate-income Americans. More recently at the local level, I took part in an event as MBA, along with the Tennessee Housing Development Agency, officially launched CONVERGENCE Memphis – a campaign focused on African American homeownership needs in the Memphis metropolitan area. In addition to CONVERGENCE Memphis, MBA will continue to expand its partnerships in other cities across the nation, seeking scalable solutions to address affordable housing challenges, both for renters and owners.

5. MBA was our first partner to move the conference experience into virtual space with the successful launch of State of the Industry in May. Can you tell us what worked for the online audience and what to expect in the coming months, especially now that the Annual MBA Convention has been moved to a virtual event as well? What can you tell us about the content slated for Annual this year?

Nothing replaces in-person interactions, but migrating to our virtual platform – MBA LIVE, was a seamless process, and I think it does a great job of delivering the industry content and engagement that our members want. So far, we have held three virtual conferences on the platform. Member feedback was positive, and we really focused on developing interactive sessions that included top industry experts, live Q&As, and polling questionnaires. We plan on hosting all our Fall conferences, including our Annual Convention – originally scheduled in Chicago in October – on the MBA LIVE platform. Our goal is to create vibrant and informative content from a “safe” “normal” environment that we’re all forced to embrace for the foreseeable future.  No doubt, our industry will be significantly impacted by the outcome of the November election, so I would expect significant content speaking to the potential housing and mortgage policies that could result from the outcome of November’s vote.  Of course, I personally am looking forward to the Economic Outlook presentation from MBA’s Research team.  😊

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