Bureaus Take Another Run At Fair Isaac
Will single-algorithm pitch be enough to persuade lenders? |
American Banker Wednesday, March 15, 2006
By Matthew Quinn <mailto:MatthewQuinn@SourceMedia.com>
The big three credit bureaus - Equifax Inc., Experian Inc., and TransUnion LLC - said they have banded together to develop a scoring system they hope will give Fair Isaac Corp.'s FICO scores competition as the industry standard.
Currently the bureaus provide FICO scores calculated using Fair Isaac's methodology and their own data but the bureaus say that the model actually differs from one bureau to the next because of changes adopted over the years. (All three sell proprietary scores, which have been sparsely adopted.)
Partly as a result, FICO scores can vary significantly between bureaus, mortgage lenders say. The three bureaus' system, VantageScore, uses a single algorithm, eliminating variances except for those attributable to the underlying data. Testing has shown variances to decrease by more than 30%, said Paul Springman, Equifax's chief marketing officer.
However, data inconsistency may be a more significant source of variances, said underwriters at two mortgage lenders. And there is no sign that the bureaus are about to commingle their data.
Dana Wiklund, Equifax's senior vice president of predictive sciences, said the bureaus shared records to build the model, but don't plan to "intermingle or collaborate on any data management."
Several lenders expressed interest in the new offering.
"I think it would certainly be a help and give some better consistency to the process," said Patrick Lamb, the president of First National Bank of Arizona's mortgage division. "Generally you're trying to get as many data points as you can to make the best decision possible."
Both National City Corp. and MGIC Investment Corp. said they would test the new score. Dave Greco, MGIC's vice president of credit policy, said he is doing so to "be prepared if the market is going in this direction," though he considers FICO's model "highly predictive of defaults."
A switch to a new scoring system could take time. Thomas G. Grudnowski, Fair Isaac's chief executive, noted that banks' technology infrastructure and credit policies have been built around his company's scores. "To change that is really, really hard, and you have to have a really, really good reason to do it," he said.
Whenever Fair Isaac rolls out a new product - such as one introduced last year that uses nontraditional credit data - it usually took years for banks to test it and get comfortable, Mr. Grudnowski added.
"The major reason for differences across scorings - their scores, our scores, anybody's scores - is the data," he said. "A common blueprint used to create scores across all three bureaus - that's what we were doing."
Mr. Wiklund acknowledged that "the scores that are out there are highly embedded and pervasive throughout the industry." He said he expects VantageScore will go "through a cycle of introduction, validation, testing and acceptance. … This is going to take several months."
Previous attempts to compete with FICO scores have not had much impact. Chet Wiermanski, the vice president of analytic services at TransUnion, said major lenders' use of its proprietary scoring model has been limited to "niches … where they don't get the results they're looking for from other products, primarily because the score isn't available at the other two bureaus."
Mr. Wiermanski said the bureaus presented the score to the Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration on Monday but neither lenders nor Fair Isaac were told about the project until its unveiling Tuesday.
VantageScores range from 501 to 990, as opposed to FICO's 330 to 850. "It would change things, I think, pretty dramatically if you went to that, because today 620 is a score at the low end of acceptable," said Joe Blaston, the director of mortgage banking at Sovereign Bancorp Inc. in Philadelphia. "And if you look at this, that would make 620 a D-score."
But the bureaus say the new system will make scores easier to understand and use for lenders and consumers, partly because of the academic-grade key accompanying the new scale (901 to 990 is an "A," 800 to 901 is a "B," and so on).
Another reason the new system will be simpler for lenders and consumers, according to Mr. Wiermanski, is that the bureaus will use identical "adverse-action codes" for reasons why a consumer's score is not perfect.
VantageScore will be independently marketed by each of the bureaus through a licensing agreement with their joint venture, VantageScore Solutions LLC. |
| ID: |
37111 |
| Author(s): |
NCRC |
| Publication date: |
15/03/06 |
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Created: 29/03/06. Last changed: 03/04/06.
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