Unseating FICO as the Preferred Credit Scoring Platform

Keyboard button spells out FICO

Photo credit: Got Credit


Helping make the American Dream more accessible.

FICO scores have been the lending industry standard for over four decades, but some lenders are beginning to cool to FICO’s algorithms, saying that they focus too much on past behavior and circumstances and not enough on consumers’ present realities. Alternative credit scoring systems have become a solid option for potential homebuyers struggling to get mortgage financing.

Jeremy Owens, a senior mortgage banker at Ameris Bank, speaks on the intention of the credit scoring system, “Existing credit scoring models were developed as a way to standardize mortgage credit underwriting.  As such, they helped open the door to homeownership in a way not seen before.”  Owens speaks on how the credit scoring system can be manipulated, “Some underwriting practices led to abuses of the standardized scoring model by giving too much validity to the algorithms/credit score.

One company has removed FICO scoring data from its mortgage approval consideration; lending platform SoFi, has opted to evaluate borrowers using its own creditworthy analysis system.

“Our approach to underwriting is based on transparency and balancing the needs of our members and investors, and we found that the FICO score was anything but transparent,” said Mike Cagney, the CEO and co-founder of SoFi.

SoFi – mostly known for student lending, claims to be the first online lender to have completely removed FICO from its loan approval process.

“We’re proud to be the only major lender that does not use the score for any lending,” Cagney said.

Instead of FICO, Cagney explained that SoFi will determine creditworthiness by looking at applicants who have a history of paying their bills on time and their income is greater than the amount of their monthly expenses and other money that’s spent. Dan Macklin, SoFi’s co-founder, described traditional credit scoring as “inaccurate, hard to dispute and even harder to pin down.” In explaining company’s decision to free itself from this credit scoring system, he added that SoFi is more interested in a “comprehensive and forward-looking approach to assessing an applicant’s financial wellness.”

Although SoFi is one lender of a growing list of financial institutions moving away from FICO, there are diverse reasons for the changes.

A 2015 Forbes article outlined several motivations behind the anti-FICO trend, including: cash flow not being regarded, an increase in Millennials not using credit cards, the impact of complicated collection items and medical debt on credit scores, a person’s ability to make rent payments on time or save for a down-payment.

Owens say, “Credit scoring models and the overdependence on them are due for an update as we recover from the crash of 2008.  I find frequent errors on credit reports despite the current regulations in place to protect customers.  These errors are due to the inefficiency of the credit reporting system itself.  One major shortcoming of the current model is the inability of a consumer to recover after a major financial set back.  Once a consumer suffers a financial setback and credit scores drop, that consumer is cut out of all mainstream credit offerings.  That consumer is more likely to spend a disparately large amount of money on common everyday expenses like auto/renters insurance, cell phone plans and deposits, utility deposits, auto financing, rent/rent deposits.”

Credit-reporting company, TransUnion is another company offering an alternative to FICO with its recently introduced, CreditVision Link credit score. TransUnion says the new product combines alternative credit scoring with trended credit bureau data, which creates a more complete and precise consumer risk profile.

In response to companies moving away from FICO, U.S. Representatives Terri Sewell (D-Ala., 7th) and Edward Royce (R-Calif., 39th) created the Credit Score Competition Act of 2015 (HR 4211). The House Committee on Financial Services is currently reviewing the bill which will also address Fannie Mae and Freddie Mac’s sole use of the FICO scoring platform, which is used to determine what loans they will back. If this makes it through Congress, GSEs would have to consider alternative forms of credit while determining creditworthiness.

“The GSEs’ use of a single credit score is an unfair practice that stifles competition and innovation in credit scoring,” Rep. Royce said in a statement. “Breaking up the credit score monopoly at Fannie and Freddie will also assist them in managing their credit risk and decreases the potential for another taxpayer bailout.”

Sewell and Royce argue that FICO’s platform poses problems for consumers without access to traditional forms of credit.

“Homeownership is an integral part of the American Dream that shouldn’t be out of the reach for low-income, rural and minority borrowers who lack access to traditional forms of credit,” Rep. Sewell explained. “This legislation takes an important step towards addressing this issue and helps make homeownership a reality for more Americans across this country.”

Data from FICO further illustrates traditional credit access challenges, showing that 53 million people do not have a traditional credit score.

FICO is not staying on the sidelines with all the changes, introducing a pilot program in last April with LexisNexis Risk Solutions and Equifax to allow U.S.-based credit card issuers to consider alternative data in determining creditworthiness. FICO executive vice president, Jim Wehmann expressed excitement for the new program:

“Working with Equifax and LexisNexis, we set out to help unbanked, under-banked and disadvantaged people gain equal access to the standard credit products enjoyed by millions of Americans,” he said. “FICO’s focus is on expanding access to credit, not simply scoring more people.”

While FICO’s credit scoring system is used by 90 percent of lenders, this number could get smaller as alternative credit scoring platforms gain more traction.

Owens seems to draw a parallel with the relationship between the credit scoring system, housing and the nation’s largest generation, “Millennials have quickly recognized this trap and in many ways are refusing to participate in the game with the current set of rules.  I expect to see creditors and credit scoring/risk models continue to evolve as common sense decisions become popular once again.  Positive cash flow and credit usage trends are a few ways credit scoring models can be updated.  Many creditors are being forced to develop consumer friendly ways of evaluating risk as Millennials demand a more equitable approach to business decisions.”



Atlanta Agent Magazine. Are FICO Alternatives Becoming the Preferred Standard?




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