MBA Premier Member Profile: FICO
(One in a continuing series of Premier Members of the Mortgage Bankers Association)
FICO powers decisions that help people and businesses around the world prosper. Founded in 1956 and based in Silicon Valley, the company is a pioneer in the use of predictive analytics and data science to improve operational decisions. FICO holds more than 165 U.S. and foreign patents on technologies that increase profitability, customer satisfaction and growth for businesses in financial services, telecommunications, health care, retail and many other industries.
One of FICO’s most important solutions is the FICO Score, which is recognized as the standard measure of consumer credit risk in the U.S. The FICO Score is used across the lending lifecycle and throughout the credit ecosystem, helping lenders, regulators, debt purchasers, consumers and other parties have a common understanding of credit risk.
Learn more at http://www.fico.com.
MBA NEWSLINK: Do you consider credit scoring to be an art or a science?
JOANNE GASKIN, AMP, FICO SENIOR DIRECTOR OF SCORES & ANALYTICS: Credit scoring is a science. Its roots go back to the 1950s and the work that Bill Fair and Earl Isaac, FICO’s founders, did to advance and commercialize credit risk assessment. They not only introduced credit scoring to the market, they developed the predictive analytics methodology that is widely used today in markets worldwide.
The introduction of the FICO® Score more than 30 years ago facilitated an expansion of credit in the US because lenders could make more successful, data-driven lending decisions, giving them the confidence to make more credit available.
The FICO Score is an Empirically Derived Demonstrably and Statistically Sound Model (EDDSS). This approach provides lenders with the comfort that all analytic decisions are based upon building the most predictive score, not open to social engineering. Because the FICO Score is an EDDSS score, FICO warrants it to be compliant with both FCRA and ECOA.
However, there is an art to credit scoring as well. Anyone can write algorithms, but it takes true domain expertise to determine, for example, which data variables overlap in their prediction of risk, or which model segmentations will provide the strongest results over time. A score needs to balance predictive power, regulatory requirements, and robustness over time, while ensuring a fair result for all consumers. Striking this balance requires analytic expertise and a knowledge of lenders’ priorities.
NEWSLINK: What trends does FICO see in credit scoring?
GASKIN: First, there is the trend toward financial inclusion. We are at an inflection point, where lenders are seeking opportunities for growth at the same time that alternative data sets have grown to national scale, creating an opportunity to address the “credit invisible” and thin file consumers.
There are 53 million people in the U.S. who are not scorable, but there are certainly a fair number of these consumers who are good credit risks. The challenge for FICO was, how do we identify them? The answer is by leveraging FCRA compliant alternative data sets. FICO developed FICO® Score XD which produces a reliable credit score with the same score range and meaning as the traditional FICO Score for an additional 15 million consumers using alternative data.
Another trend we are seeing is greater consumer awareness. This has entered a new phase, thanks in part to the FICO Score Open Access program, which now provides free FICO Scores on a recurring basis to more than 150 million credit accounts in the U.S. Not only do lenders share these scores, they provide greater transparency by sharing the exact scores that they use on decisions about the consumers’ credit.
NEWSLINK: How has technology improved credit scoring for consumers and lenders?
GASKIN: Advances in credit scoring technology–and in the data being used for scoring–continue to expand credit options for consumers, while at the same time helping lenders manage risk to make sustainable loans.
Some of the changes in credit scoring technology are happening with the FICO Score, the standard measure of U.S. consumer credit risk. For instance, while much has been said about the need to include rental and utility data in credit scores, this won’t move the needle in terms of scoring more people without standard credit histories.
When rental and telecom data is present in the credit file, it is factored into the calculation of the FICO Score 9, but unfortunately this information is not widely available at the three primary CRAs.
Rental data comprises .01 to .02% of all tradelines reported, which results in helping just tens of thousands of additional consumers to obtain a FICO Score 9–not millions. This is one reason why FICO has explored alternative data sources in developing FICO Score XD. These sources include the telco billing and utility data that is part of the National Consumer Telecom & Utilities Exchange (NCTUE) database housed and managed by Equifax, which represents more than 200 million unique consumers. We found this data to be a strong predictor of credit risk, enabling us to build a more refined profile of the underserved thin file consumers and more precisely assess their level of creditworthiness.
Other changes in credit scoring are extensions to the FICO Score. For example, FICO has pioneered the use of economic impact scoring, which assesses the likely changes to consumers’ risk–at the individual and aggregate levels–which would be caused by different economic scenarios. This is a way for lenders to “future proof” their lending decisions. FICO has also worked extensively on credit capacity scoring, which evaluates consumers’ credit risk should they take on additional credit. Both of these technologies are aimed at helping lenders make more responsible lending decisions based on a more comprehensive view of risk.
NEWSLINK: What is the single most important issue facing your company right now?
GASKIN: We believe it’s absolutely vital that consumers have the information and tools they need to understand how credit works, and how to manage their own financial risk. While great gains have been made in this arena, many Americans are still confused about how credit scoring works, and don’t know how they can find out their credit score, much less how they can improve it.
At our conference in April, Scores EVP Jim Wehmann discussed conversations he had had with a number of consumers, some of whom had suffered major financial setbacks. Some of their problems could have been lessened if they had understood the impact their own actions were having on their credit health. Improving Americans’ financial literacy is a priority for FICO.
NEWSLINK: Why did your company join the Mortgage Bankers Association?
GASKIN: The U.S. mortgage industry is an important part of FICO’s global business–we recognize that we are used as an input into the underwriting and securitization process, which creates liquidity and affordable mortgages for consumers. Supporting sustainable homeownership for consumers and the US economy is important to us. To do this, we need to continue to work with all parties in the mortgage ecosystem. Being a member of the MBA helps facilitate those interactions.
(MBA Premier Member Profiles are a service provided by the Mortgage Bankers Association and MBA NewsLink as a service to MBA Premier Members. Publication does not constitute an endorsement of a particular company, product or service. For more information about the MBA Premier Member program, contact Julie Dychkewich at jdychkewich@mortgagebankers.org or 202/557-2779.)
