Credit giant FICO is releasing their newest credit scoring algorithm into the wild this fall. This newest iteration, the FICO Score 9, ignores collection accounts when the underlying debt has been paid off, and penalizes medical collection accounts less than other types of collection accounts. The FICO Score 9 algorithm is expected to increase the points of affected borrowers by up to 25 points.
We don’t think it’s a coincidence this new algorithm comes right on the heels of a May 2014 Consumer Financial Protection Bureau (CFPB) research report criticizing the treatment of medical collection accounts by the existing credit scoring models. The CFPB press release outlines credit score improvements which look a lot like those found in the FICO Score 9. Good for FICO, good for the CFPB…but is it good for borrowers?
Not really. Lenders have to adopt the FICO Score 9 in order for these changes to impact borrowers. Lenders have several credit score algorithms (FICO or otherwise) available to them, and there’s nothing that compels lenders to change their scoring models just because a new one is available. Given the multiple years they were able to collectively drag out the implementation of the new loan disclosure forms, it’s not likely they’ll jump on this new credit scoring bandwagon.
But allow us a few paragraphs to just suppose, for the hell of it.
If we were looking at FICO to reach out to distressed borrowers, we’d ask if they were planning on making similar concessions to borrowers who were in financial, rather than medical extremis, as a result of the financial crisis. We’d ask why the credit impact of an unforeseen illness is more forgiveable than the impact of a documented, nationwide financial crisis in which millions of Californians lost their wealth and livelihoods. (We did, as a matter of fact, ask them these questions – they have yet to comment.)
That’s not an exhortation to ignore derogatory information. It’s a parallel drawn between the repercussions of a medical emergency and those of a financial emergency. Both are anomalies caused by forces stronger than the individual, and do not of themselves indicate a likelihood of future default. Except if these emergencies penalize the borrower to create a feedback loop, eventually resulting in (among the more clinical results) a lower credit score. That’s what FICO Score 9 is attempting to alleviate, for medical collection accounts.
In any case, the FICO Score 9 isn’t the result of any sudden blush of altruism from FICO. It’s likely a reaction to the CFPB’s gentle arm-twisting about an issue which causes a relatively minor interruption to FICO’s business-as-usual.
But as gatekeepers to credit for 90% of all types of lending in the nation, FICO isn’t just any business. FICO’s credit scoring models are one of the first hurdles borrowers have to pass in an increasingly automated loan decision process. And the wiggle room for extenuating circumstances is shrinking as lenders seek to cover their assets while still churning out the mortgages (it ain’t as easy as it used to be.)
FICO sets the initial bar, 90% of the time. They are an integral part of the American financial machine. As such, they have a stake in and responsibility to mitigate the negative impact their scoring models have during times of widespread financial distress. Check out our charts of delinquencies and foreclosures, and they’ll show you the equivalent of a financial heart attack between 2007 and 2013.
We’re not talking about FICO attempting to identify, quantify and parse something amorphous like job loss. We’re talking about adjusting the credit score impact of delinquencies and foreclosures which took place during the financial crisis. It’s just dates, and data (delinquencies, foreclosures) already collected.
We’re just throwing it out there. At this point, the recovery has taken the steam out of any large-scale adjustments to the status quo (and lenders wouldn’t adopt this scoring model, anyway, without a government mandate.) But here’s to just supposing: a little help would have been nice.