LATMAP Orientation Meeting

News Wire: The NEW FICO Score of 2008

Default Lines: The New Math of Credit Scores
by Jane J. Kim
Thursday, December 20, 2007
provided by The Wall Street Journal Online

The company that cooks up credit scores for millions of Americans is changing its recipe -- and that could affect how easily you get credit in the future.
Fair Isaac Corp., maker of the popular FICO credit score used by most lenders, says its new scoring model will do a better job predicting the likelihood of a borrower defaulting on a loan. For one thing, the new model, dubbed FICO 08, will be more forgiving of occasional slips by consumers, but will take a harder line on repeat offenders. Fair Isaac predicts its new system will help lenders reduce default rates on their consumer credit by between 5% and 15%.
The rollout of the new credit-scoring system comes at a time when lenders say they are eager for more-accurate measures of credit risk, in part because of rising loan defaults as subprime mortgages go bad and housing prices fall. And there are signs that delinquencies are creeping into other types of consumer debt, including auto loans, further prompting lenders to tighten up on credit.

The FICO score, which Fair Isaac says is used by 90% of the 100 largest banks, and other similar scores hold sway over the lives of millions of people. Financial institutions use them to determine the granting and pricing of credit, insurance, cellphone usage and, in some cases, employment and utility services. Some consumer groups have raised concerns about whether credit scores are being used properly and whether they are valid measures of credit risk for some groups of consumers, especially minorities and lower-income individuals, says Travis Plunkett, the legislative director for the Consumer Federation of America.


Credit scores, which are calculated using proprietary models, also are criticized for a lack of transparency. "This is a product, per se, but it's a product that has inordinate influence on the financial lives of hundreds of millions of Americans," says Mr. Plunkett. Fair Isaac, based in Minneapolis, says it believes it does a good job of explaining the factors that go into calculating the FICO score and in guiding consumers on how to manage their scores.

Consumers could start seeing the new FICO scores by the spring, though some lenders may take additional time to test the system to see how it works with their business and loan portfolios. Fair Isaac, which last revamped its scoring model earlier this decade, says it is accelerating its FICO 08 rollout, partly in response to lenders' demand for better risk-management tools.

The latest version of the FICO score will largely look and feel the same to consumers and lenders. Scores will still range from 300 to 850 -- the higher the better -- and the model will continue to look at the same factors, including consumers' level of credit indebtedness and payment histories, length of credit histories, number of recent credit openings and inquiries, and the type of credit used, to determine scores.

But the new model will more finely slice and dice the information in consumers' credit files to do a better job of separating the "good risks" from the "bad risks," particularly for subprime borrowers; those with "thin," or young, credit files; or consumers who are actively seeking new credit. "Those are the communities that lenders are most interested in" to determine credit risk, says Craig Watts, spokesman for Fair Isaac.

"Consumers who are low risk will score better with the new FICO version, and consumers who are high risk will score lower," says John Ulzheimer, president of consumer education for Credit.com, a personal-finance Web site. Higher-risk borrowers may find it tougher to get credit, while those with less-risky profiles -- though they may have gotten approved for credit accounts in the past -- will start to get better deals from lenders, he says.

Two people with the same FICO score currently could see their scores diverge under the new system. One possible reason: FICO 08 gives more points to consumers who maintain a variety of credit types, such as credit cards, a mortgage and auto loan, because it shows they can manage payments on different kinds of loans. On the other hand, the new scoring system penalizes to a greater degree borrowers who use a high percentage of their available credit.

FICO 08 also will draw greater distinctions among different borrowers who are at least 90 days late in making a loan payment, known as a serious delinquency. Traditionally, many credit-scoring models grouped subprime consumers into one general category. But Fair Isaac says its new model will give a higher score to a borrower in arrears if they also have a number of other credit accounts in good standing. Conversely, a person's score could drop if he or she has multiple delinquent accounts.

"Overall, more consumers will see their FICO scores go up slightly than will see their scores drop," says Tom Quinn, vice president of global scoring solutions for Fair Isaac.

Despite the new scoring model, consumers still have to make sure the information in their credit reports, which Fair Isaac relies on to come up with its score, is accurate. If consumers feel their FICO score is unfair, they would have to go to the individual credit bureaus, Experian Group Ltd., TransUnion LLC and Equifax Inc., for a copy of their credit report on file and look for any errors or missing information. If there are any, they would have to contact the credit bureau or the financial institutions to dispute those errors.

FICO 08 also aims to curtail the growing business of allowing people to polish their credit by "piggybacking" on someone else's good credit history. In recent years, credit-repair Web sites have sprung up that arrange for subprime consumers to boost their scores by becoming authorized users on accounts held by strangers with better credit. When scoring a consumer, FICO 08 won't take into consideration credit-card accounts for which that person is an authorized user. But the move also will hurt legitimate users: People who give a credit card to a child or a spouse as an authorized user to help boost their credit score.

FICO 08 is likely to face some competition from VantageScore Solutions LLC of Stamford, Conn., a joint venture of the three credit bureaus that was rolled out in 2006. Fair Isaac has sued VantageScore and the three bureaus, accusing them of using unfair and anticompetitive practices to harm the FICO brand. Recently, Equifax linked the suit with the launch of FICO 08. The company has said it wouldn't move forward with FICO 08 and that its relationship with Fair Isaac remains "strained" until the lawsuit is resolved, says David Rubinger, Equifax spokesman. The new FICO model has already been distributed to Experian, which is in the process of implementing it, while TransUnion expects to have the scoring model available for lenders to test during the second quarter of 2008. Fair Isaac says its intention is to provide the formula to all three credit-reporting agencies.


Copyrighted, Dow Jones & Company, Inc. All rights reserved.
Link to Article

News Wire: County of LA Programs - Fully Expended

Another blow has been dealt to first-time homebuyers wishing to take advantage of government-back subsidized loan programs. The County of Los Angeles' Homeownership Program (HOP), American Dream Down Payment Initiative (ADDI) and S-HOP programs are now out of funds for an unspecified amount of time. Buyers who have already approved loans from these aforementioned programs are likely to be put on a waiting list or have their loan carried out in the pipeline to closing. Others, such as those getting pre approvals, will be stuck until the County replenishes it's funds - hopefully, around March/April of this year. But until then, all we can do is wait...

A Success Story: Margarito Nava

December 1, 2005
Margarito Nava, Maintenence Worker and Cashier


Margarito Nava learned about CFRC’s Individual Development Account (IDA) program in the local Spanish Language newspaper La Opinion, and he wanted to find out if the program was really true. After attending an orientation, Mr. Nava enrolled in the program, which promised to match his savings with up to $4,000 that he could use for an asset purchase, including his desired goal of purchasing a home.

"[CFRC is] You are really doing a great
job to the community, Latino community. It is a big change. There isn't anything
like having your own space for the kids to jump and play--to do whatever they
want."

Mr. Nava attended the program’s homebuyer education and financial education courses. There he learned how to manage his money and budget, and learned about the homebuying process and how to get a loan. After accumulating his savings, Mr. Nava found a real estate agent to work with and then initiated his search for the house of his dreams. In about a month, Mr. Nava entered escrow. However, he was not satisfied with the deal he received.

"When we were in escrow, I didn't like
the loan. We were getting a 12% interest rate and excess in fees."

At the prompting of his CFRC financial counselor, Mr. Nava talked to a different lender, who was able to lower the interest rate on his loan by more than six percentage points. The reduced rate brought his mortgage payments to a comfortable, affordable level - even freeing up enough money to fund the addition of a new bathroom, new room and kitchen.

Although, Mr. Nava admits he is under more pressure to make his monthly mortgage and will have to become acostomed to making higher paments, like the old saying goes, si,vale la pena - that's Spanish for "It's worth it."

And for good reason. Homeownership is an opportunity that many wish for, but not all have the advantage of experiencing. Families like Mr. Nava's acknowledge this reality and seem to be up for the challenge - having to forego "a lot of things we didn't use to" and setting priorities in order to reach their goal of living in their own home. But throughout the entire process, Mr. Nava seems to be content with where he is in his life and definately appreciative of the support he received.

"I thank you for making my dream come
true. I hope you continue to help more families."