FICO's Fundamental and Irrational Flaw Causing Damage to American Graduates

[DukeLaw11]

I am an attorney with a decent starting income ($70,000+ working for the federal government) and very good financial sense.  I have no credit card debt, I own a home (which I rent out) and rent a condo near my job.  My expendable monthly income (i.e. after bills) is $2,000 per month.  I max out my and my wife's IRA every year and have approximately $15,000 in the bank. 

Recently, I applied for an auto loan for $13,000 with $3,000 down.  The car was through an independent dealer, but the Retail Bluebook value was $16,000.  I was NOT APPROVED for this loan!  After asking to file a complaint, I was directed to supervisor who explained that my debt load was too high.  According to him, I had no expendable income...

How could this be?  My checking account balance goes up by $2000 a month and I'm not defaulting on anything...  Does money appear out of thin air for me?   It turns out that the auto lender (a major bank), like most creditors, utilizes what I will call a "straight line credit analysis."  As such, all debt is treated essentially the same, regardless of the true nature of the debt.  In my situation, I have $270,000 in student loans.  So they were showing that my debt load was nearly $4,500 a month, and that I had NO expendable income.

What their, and every other outdated metric fails to realize, is that 97% of my student loans are federally funded and in income-based repayment.  What does this mean?  It means that my student loan debt could be $30,000, or ten million dollars, and my current payment would be exactly the same (approximately $500 / mth.).  The underwriter, whom I will call "Boomer Moron" (typical late-forties arrogant male) advised me that he understood debt, he'd been underwriting loans for 20 years, and that it didn't matter that my loans were in "deferment", since "they will eventually come due."  Anyone who understands IBR will appreciate how inaccurate both of these misstatements are.

Despite my attempts, his arrogance could not be dissuaded.  In his mind, I could not afford the loan, and it would take overturning his whole mechanized universe to suggest otherwise.  In reality, not only could I afford the loan, I didn't really need it!

It is well publicized that we have an impending student loan bubble in this country.  What is not so widely publicized is that the bulk of the bubble will fall on Uncle Sam, and, unfortunately, the tax payer.  Individuals in IBR will not experience the significant financial struggles of yesteryear caused by overburdening student loans because the loans are capped at 15% of adjusted gross income and dischargeable after 25 years (10 years in my case under public service repayment).  Despite this, there may very well be another individual credit crisis in this country because, almost unfathomably, the nations largest creditors do not understand how the country's largest undersecured debt works!

Student loan debt is not "real" debt.  If I charged a million dollars on my credit card, I couldn't just say "tell you what Visa, I'll pay you what I can afford to pay you, and you just forget the rest after a few years."  In contrast, this is exactly how federal student loans work today (caveat: for those under the 25 year plan, the discharged debt is still taxable as income, but this loophole has been addressed twice by Congress and will almost certainly be closed by the time 25 year IBR discharges begin).

In conclusion, I am far more credit worthy than the average 40 year old male with a mortgage and 2 kids!  I don't have any "hidden" debt.  I can actually afford to repay my debt!  But FICO, Transunion, and the nation's largest banks don't see it that way.  They would rather lend to someone with a car, a mortgage, 2 kids, and a hidden gambling habit juggling debt to maintain their 740 FICO score.  Is there any wonder that credit defaults and subsequent crises occur every decade or so when the institutions we put in charge of such things can't take the time to understand a program that accounts of a trillion dollars of American debt?  I am probably one of the most credit worthy people in the country from a rational standpoint.  But, a major bank won't give me a $13,000 loan for a significantly over-collaterized used car.

[Shogun]

I can certainly see where you would be fine with the loan, in fact, it would quite easy for you.  But the header in your post is innacurate.  FICO did not prevent you from getting the loan.  FICO does not care how much the loan is.  It would factor in 2700 the same as 270,000.  FICO does not care about your income either.  The only factors it includes is the status of the debts, paid/paid on time, etc.  That decision was made by a UW that was looking at your situation, and I believe he was wrong, but that's my opinion.

[pizzadude]

I'm not clear on why you are claiming that FICO is flawed.   It sounds like you were denied this loan based on your DTI, not because of a FICO score.    FICO scoring ignores your income and also doesn't care about the size of your indebtedness.

Unless you have late payments or other negatives I'm assuming that you have a pretty good FICO score.

[Mopar_Jones]

Shogun and pizzadude...  I don't think he was bashing FICO itself.. merely the method that banks use the information the FICO score provides..

A score is a score though.. and banks can choose to use that information any way they want. He might be unaware that the bank probably even might have used their own scoring method.. I understand what he is saying, and it can certainly be frustrating.

On a side note to help you out.. since you work for the federal government, as I do also, did you know that if you make 10 years worth of payments, and you have 10 years of federal service, the rest of the loans can be forgiven? Have you also applied for the student loan repayment program? I don't know if your organization pushes it or not, but everyone can apply for it..

I work with an attorney who works for ARDEC. He's a GS-14, so he's making about $130k or so.. he applies for it every year and gets it. About $6k of free money a year to pay his law school loans with..

[Cloudlb]

I don't know how lenders treat student loan debt.  You might be able to find some good info on that here.  

I submit that maybe he didn't want to give you a loan because of the huge chip on your shoulder.  ( "boomer moron" -- really?  Are all your clients going to be under the age of 40?)

[YahComb]

concur, can't blame FICO for this. Lenders always use their own other criteria for who to/how much to give out.

Also, we're at the point in time now where those "late 40s boomer morons" are really gen x'ers (yes that much time really has passed) and probably resent being called boomers more than morons