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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Lending

Are FICO scores becoming a thing of the past?

One lender says yes

January 13, 2016

While most people can agree that the current credit score system needs work, not everyone can agree on the proper solution.

Take a look at San Francisco-based SoFi as an example. The company operates like a young tech garage in Silicon Valley except it’s a a disrupter in the mortgage industry, pushing the limits by doing things like choosing to not use FICO scores when evaluating applicants.

Here’s a clip from the lender’s blog explaining the reason behind that decision:

The idea of assigning a score based on your dealings with debt makes sense in theory, but in practice there are a few flaws.

The FICO score calculation doesn’t consider things like your savings, your cash flow, your ability to pay non-credit bills like water and electric or your future earnings (for example, if you just landed a job with excellent pay). Plus there’s the fact that a growing number of millennials are forgoing credit cards entirely, which is reflected negatively in their credit scores – even though they may be perfectly able to pay off a loan. All of these factors can have a major impact on your creditworthiness, but your FICO score doesn’t take them into account.

Because of these gaps, SoFi has chosen to not use FICO scores when evaluating the financial wherewithal of applicants. We still consider your track record of meeting financial obligations, but we also look at a more complete picture of your financial situation than what your credit score can provide.

Whether you agree or disagree with this method, SoFi seems to be doing well in its endeavors.

The lender only recently ventured into the mortgage industry, expanding past the world of student loans where it got its start.

Toward the end of 2015, SoFi announced that it had not only officially surpassed $4 billion in funded loans across mortgages, personal loans and student loan refinancing, but it also announced $1 billion in Series E funding shortly after.

"SoFi continues to redefine consumer expectations in financial services. This funding will dramatically advance expansion of our disruptive products and experiences, and in turn, meaningfully benefit financially responsible individuals.  Our trajectory is clear: we are well on our way to becoming the most trusted financial services partner in the U.S.,” Mike Cagney, SoFi CEO and co-founder, said at the time.

It's not just mortgage lenders questioning the credit scoring model — the government isn’t too fond of the current credit system either.

In December, a bill was introduced in the House of Representatives that would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use when determining what loans to purchase.

The bill, which is entitled the “Credit Score Competition Act of 2015,” was introduced by Rep. Ed Royce, R-CA., and Rep. Terri Sewell, D-AL.

In Royce and Sewell’s view, lower-to-middle income Americans who are qualified to buy a home but are unable to do so because of their FICO score or lack thereof will “specifically benefit from the GSEs using other credit scoring models.”

This is in addition to Freddie Mac’s CEO Donald Layton telling HousingWire last year that Freddie was already considering “one or two alternatives to FICO,” and Secretary Julian Castro saying that HUD is open to alternatives in a speech earlier in 2015.

While they may not be scrapping the FICO method like SoFi, change is happening. 

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