“Today, lenders use credit-scoring models sanctioned by the Federal Housing Administration, Fannie Mae and Freddie Mac. But in the past ten years, technology has matured, increasingly granular data has become available, and consumer behaviors have changed,” Debra Still, president and CEO of Pulte Financial Services recently wrote in a column for American Banker. “Using updated and more sophisticated models would help lenders reach significantly more consumers, many of whom would qualify for mortgages even in today’s environment of tight credit standards.”
It’s important to note that the goal isn’t to loosen credit standards to allow people who are a credit risk to access financing but rather it’s to ensure qualified borrowers aren’t being overlooked.
The two largest developers of credit scoring models, Fair Isaac and VantageScore, estimate that there are tens of millions of American whose credit score cannot be determined by current scoring methods, according to Still.
And there are new methods available that could rectify that.
“The newest model from VantageScore uses a special segmentation technique that recognizes the value of data up to and greater than 24 months old. This allows VantageScore to generate scores for 30 to 35 million of these consumers, 7.6 million of whom receive scores above 620,” Still wrote. “That is 7.6 million potential borrowers who would pass the first test of eligibility just by using an updated scoring model.”
Still argues that modernizing credit scoring methods is an “actionable step towards sustaining progress in the ongoing housing recovery.”
Could a new credit scoring model be on the horizon, and what could it mean for originators?