The Fair Isaac Corp. recently announced their newest version of the commonly used credit scoring model, FICO. The new version, dubbed FICO 9, is purportedly more accurate and beneficial for first-time homebuyers. Unfortunately, adoption of this scoring model is highly unlikely anytime soon.
FICO 9 addresses issues that are high on the list for Hispanics and millennials, who are expected to make the majority of new-home purchases over the next decade.
First, the new scoring model diminishes the effects of medical collection debts. As long as the debts are paid (whether or not they went to collections), they would have little influence on an individual’s credit score.
Millennials are likely to be most affected by this scoring adjustment. The majority of Millennials prefer online banking and automated payments. Because medical bills do not arrive electronically, they frequently go unnoticed until they have already hurt their credit. FICO 9 does not penalize consumers when these previously unknown debts are paid.
While FICO indicates a slight increase in credit scores (a median increase of 25 points) for consumers with medical debts, the real impact of FICO 9 is its evaluation of borrowers with a limited credit history.
In NAHREP’s State of the Hispanic Homeownership Report, limited credit history is listed as one of the top three barriers to Hispanic homeownership. Traditionally, Hispanics pay for large purchases in cash, and their debts are limited. Since Hispanics comprised nearly half (47%) of the overall growth in homeownership last year, this adjustment is critical to the industry.
For years, consumer advocates have been trying to get lenders to consider alternative credit scoring models, such as VantageScore, which can also evaluate consumers with limited credit history. However, Fannie Mae, Freddie Mac, and the FHA (which buy 90% of U.S. home loans) have exclusively used FICO scoring models.
So this is exciting news! Problem solved, right?
Unfortunately, Fannie and Freddie, along with the majority of lenders, refuse to make the adjustment. They are still utilizing FICO 4, much less moving towards the adoption of FICO 9 anytime soon. The Federal Housing Finance Agency, which oversees Fannie and Freddie, recently released their 2015-2017 goals, in which they include very little prospect for growth in this arena.
Industry leaders say the costs of making adjustments to their automated underwriting systems “outweigh” the benefits FICO 9 bring to consumers. Along with other consumer priorities, FICO 9 gets washed out in comparison with the high costs associated with the existing regulatory environment.
The needs of first time homebuyers have changed drastically and will continue to change with demographic, cultural, and economic shifts. The long-term costs of continuing to ignore alternative scoring models may prove to be a significant barrier to growth in the industry.
[CORRECTION: An earlier version of this story stated that Fannie and Freddie were using FICO 7. It has been updated to reflect that they use FICO 4 scoring model.]