Looking to the Financing Future: FICO 8 Gets an Add-On
FICO (FICO), the credit score provider owned by the Fair Isaac Corp. teamed up with Equifax (EFX) and Moody's Analytics to launch a new product that helps lenders predict borrower behavior in order to better anticipate account and portfolio risk in light of shifting economic events. The new FICO 8 add-on, unveiled April 13 at a trade show in Miami, is called the Economic Impact Index (EII), which can be used in credit policy management, performance monitoring and portfolio stress-testing across six different economic scenarios, according to Mike Harvey, vice president of Equifax Strategic Alliances. By implementing EII, FICO hopes to reduce the gap on risk expectations for borrowers. The adjustments can be seen in the following two graphs, provided to HousingWire and part of the FICO presentation today. Here is the score without the EII: And with the EII: "Strong demand in the marketplace drove development of this product," Harvey said. "What was discovered during the current recession is that FICO risk scores were continuing to measure credit behavior and, at the same time, lenders wanted additional tools to help them navigate the potential impact of changing economic conditions." He adds: "The Economic Impact Indicator is one solution among a number of other Equifax tools and data assets that can give lenders a 360 degree view of their portfolios. As a result, there is strong interest among today's mortgage finance customers who want greater insight into the economic risk associated with mortgage portfolios." Careen Foster, a director at FICO explains that lenders today make economic adjustments by tightening and loosening credit policies and the index provides a more scientific way of approaching those changes. Foster set aside fears that the EII may restrict access to credit by borrowers. "Depending on how lenders use the new tool and what happens in the economy, [the add-on] could result in more consumers qualifying then they would had lenders not used FICO Economic Impact Index," she said. Lenders that adopt FICO Economic Impact Index gain access to economic intelligence based on dozens of key economic indicators, including unemployment, gross domestic product, interest rates, housing prices and foreclosures. With economic forecasts updated quarterly, the Index provides lenders with an analytically objective basis for adjusting their underwriting policies, account treatment, reserve levels and capital requirements. Users of the EII can adopt up to six different economic scenarios. In the first scenario, for example, consumer confidence rebounds and the economy is recovering quickly. In the third, by way of comparison, the scenario is prolonged retrenchment, leading to a very severe recession. The EII adjusts accordingly when each scenario is selected. The model depicts a 24-month horizon of borrower behavior. Write to Jacob Gaffney. Disclosure: the author holds no relevant investment positions.