Credit in the News

[MattH]

Hmm, several unrelated thoughts
 
First, my interest in FICO scoring began from intellectual interest in the statistical data mining algorithms used. I work in pharmaceutical R&D, where we use similar statistical tools. Google Framingham Risk Score for an example of a medical scoring model that predicts who is at greatest risk of having a heart attack for instance. One of my data mining textbooks says the borderline between subprime credit and the lower end of good credit is where lenders expend special effort towards finding better ways to rank customers by risk. The borderline customer can be very profitable or very costly, so a lender who can find ways of approving more applicants without increasing risk can make a lot of money. Put another way, if a lender figures out a better way to tell an 810 applicant from a 780 customer that's hardly gonna make much difference because at that range of FICO scores profitability will be dominated by factors other than credit scores anyway. Therefore much innovation both good and bad takes place on the borderline between subprime and low prime credit.
 
Second, about 30 years ago the US Supreme Court made a very important decision: that States could not enforce their usury laws to restrict interest rates charged to their residents by out-of-state lenders. A couple states promptly eliminated their interest rate caps in order to get banks to set up shop there and thus provide jobs -- which is why if you still pay by paper checks the mailing address will usually be in the Great Plains. This decision enabled lots of financial innovation, some it probably good ideas and some perhaps less good. Before this decision subprime lending basically meant loan sharks who used collection methods not available to legal businesses.
 
Third, there is considerable political interest in finding ways to improve financial services to those who are known in the industry as "underbanked," people who use check cashing places, prepaid debit cards, and payday lenders. Many people with limited incomes pay much more to use what money they have than do people with stronger finances. A major difficulty with helping these people get better access to banking services is their lack of conventional credit history. So there is significant public policy interest in finding new sources of data to improve credit decisions for those with thin files. Whatever happens in this area, I doubt it will have much effect on how lending decisions are made for people who do have thick conventional credit histories, for whom existing tools work quite well.

[jetsfan2012]

Doubt this will stick around.

[Revelate]

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jetsfan2012 wrote:

Doubt this will stick around.

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And what would replace it?  Right now the sub/-prime and lower market is best served by internal lending models; however, the data each lender has is substantially less than Experian's own result set.  If this new score produces a higher profitability for a lender's portfolio, then they'll switch to this until their internal algorithms catch up / surpass it.  

It's probably cyclical between FICO et al. vs. internal lending models as to their relative weights in an underwriting model; and frankly if FICO was best for each and every individual consumer (or lender for that matter) it would be the only score in existance.  The fact that it isn't, means there's opportunities for money to be made in the margins of the algorithm.

Odds are more likely FICO comes up with a product to match, than Experian's going away.

[marty56]

IMHO if I was a CRA I would not invest any money in this since their potential list of customers could be affected by state and local regulations.

[drkaje]

It just seems like they're making more super high risk loans easier while pretending it's to help people.

[Revelate]

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marty56 wrote:

IMHO if I was a CRA I would not invest any money in this since their potential list of customers could be affected by state and local regulations.

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Would you please clarify that?  Experian is a CRA, and their list of customers are banks... what state regulations govern the underwriting policies of banks with regards to which scores they pull / databases they can check?

[marty56]

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Revelate wrote:

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marty56 wrote:

IMHO if I was a CRA I would not invest any money in this since their potential list of customers could be affected by state and local regulations.

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Would you please clarify that?  Experian is a CRA, and their list of customers are banks... what state regulations govern the underwriting policies of banks with regards to which scores they pull / databases they can check?

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A payday lender would have to pay to pull your credit from a CRA or a third party who provides access to a CRA.  If I ban payday lenders then the customer base goes down unless a bank or cellphone/cable company wants to work thaat that customer base.

[Revelate]

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marty56 wrote:

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Revelate wrote:

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marty56 wrote:

IMHO if I was a CRA I would not invest any money in this since their potential list of customers could be affected by state and local regulations.

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Would you please clarify that?  Experian is a CRA, and their list of customers are banks... what state regulations govern the underwriting policies of banks with regards to which scores they pull / databases they can check?

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A payday lender would have to pay to pull your credit from a CRA or a third party who provides access to a CRA.  If I ban payday lenders then the customer base goes down unless a bank or cellphone/cable company wants to work thaat that customer base.

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Except the data sources are more varied than that, and it's not the PayDay Lenders that will be buying this score.  The problem is they're the ones with the data, and somehow that's got to get into the system.

This score is going to be used in the Cashcalls, Plaingreens, etc of the world potentially; probably not PDL's where they don't check credit anyway AFAIK.

[FrugalRican]

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drkaje wrote:

It just seems like they're making more super high risk loans easier while pretending it's to help people.

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You'd think the last few years would have taught people a few lessons.

[Revelate]

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FrugalRican wrote:

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drkaje wrote:

It just seems like they're making more super high risk loans easier while pretending it's to help people.

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You'd think the last few years would have taught people a few lessons.

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Money to be made my friend.  BIg money actually given the number of people who have fallen from grace credit-wise.