Will new FICO scores set consumers up for a fall?

by Ryan Smith11 Aug 2014
The announcement Friday that FICO would revamp the way it calculates credit scores was hailed by industry pros as good news for home ownership. But could the change actually be setting consumers up to fail?

FICO announced on Friday that under a new system, it will begin ignoring paid collection accounts and place less emphasis on unpaid medical bills when calculating credit scores. Those consumers whose only major black marks are unpaid medical bills could see their credit scores rise by as much as 25 points, according to the company.

The decision was hailed by National Association of Realtors President Steve Brown, who said it will increase consumer access to home ownership.

“This move will ultimately make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores,” Brown said. “Since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership. NAR will continue to support efforts to broaden access to credit for qualified homebuyers.”

But Rob Garver, national correspondent for the Fiscal Times, pointed out that most banks would probably consider numerous collection accounts – paid or not – to be relevant data when considering whether to offer a loan.

“In the end, the worst-case scenario is that the new scores will result in many consumers getting loans they shouldn't, landing in serious financial trouble,” Garver wrote.

However, one industry pro disagreed with Garver’s assessment. Nessa Feddis, the American Bankers Association’s senior vice president for consumer protection and payments, pointed out that all FICO had to sell was the reliability of its ratings. If the company wasn’t certain its ratings would remain reliable, Feddis told the Fiscal Times, it wouldn’t be making the changes.

“At the end of the day banks and all lenders want the most predictive score,” she said. “If it's not predictive, they won't use it.”

What do you think? Is FICO’s decision to recalculate credit ratings a boon to the mortgage industry? Or is it setting consumers up for a fall? Let us know in the comments below.

 

COMMENTS

  • by Michael Llewellyn | 8/11/2014 9:43:20 AM

    Somebody needs to introduce Ron Garver to the real world of mortgage lending. As a mortgage broker for 37 years, I can assure you that this is a great move. Until now consumers have been unfairly punished by the double whammy of an overly punitive credit rating system related to collection accounts and the GSE's LLPA structure. In almost every circumstance where we have dealt with collection accounts, the client was either unaware of the collection account and in most cases would have been willing to pay the account if they had been notified, or they had been sent to collection for money they did not owe. And we're not just talking a 25 point hit - a $50 medical collection account can lower someone's scores 85 points. The system is unfair and biased towards trying to extort people to pay collection accounts. The lower credit score didn't mean they couldn't get a mortgage, it just meant that they had to pay ridiculously higher rates or fees to get it, punishing them unfairly. Poor payment history on debts, high credit card balances, and unpaid installment accounts are all indicators of a poor credit risk - a $75 collection account from some long-ago utility company does not make one a high credit risk. So, here's the reality Ron - it's not clients with a whole bunch of collection accounts that present the problem, it's the consumer punished for having one or two small collection accounts that is.

    Great long overdue change!

  • by kklovestheravens | 8/11/2014 11:01:18 AM

    100% Agree Michael! Perfectly said!!

  • by Gordon Schlicke | 8/11/2014 11:44:00 AM

    This was a good move: Under most medical plans, a doctor has one year in which to send his bill to the insurer (this allows them to have greater control over their cash-flow). But a lot can happen in the lives of consumers over a one-year period. This has contributed to medical bill difficulties but the medics don't want it changed (can you blame them?). The other contributing factor was that medical codes are not transparent to consumers. If the office coder chooses the wrong billing code the bill won't get paid. And you may not know about this for months. Credit reporters don't drill down this far, thus the ratings suffer. The only way I could clear up my case was to challenge the insurer, prepare and attend a hearing; and get it resolved. The last to know is the credit reporter.

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