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Credit
Scores
provided by Fair, Isaac Co
Credit
Bureau Scores are one of the many elements that are reshaping
today's mortgage industry. Credit scoring has been
around since the 1950s, and Credit Bureau Scores - scores
based solely on credit bureau data - became widely available
in the 1980s. Today, Credit Bureau Scores are used
extensively in such industries as bankcard and auto lending.
Following are answers to frequently asked questions by
those new to credit scoring in mortgage lending.
Frequently Asked Questions
 How
can I find out what my credit scores are?
Where
can I find a copy of the California Senate Bill 1607 Release
of Credit Scores to Consumers?
Why
is the score on a report I ordered different than the
score another Broker ordered?
What
is a Credit Bureau Score and how is it calculated?
Why
did a credit report receive the score it did?
How
can a borrower increase their FICO Score?
What
if a score is affected by information that is not theirs?
If
derogatory information is removed, how much will the score
increase?
What
would happen to the score if balances were paid and accounts
closed?
Do
inquiries affect the credit score?
Should
the credit score be passed on to the borrower?
Why
can't some files receive credit bureau scores?
What
does a score mean?
Doesn't
using credit scores mean fewer people will get mortgage
loans?
If
scores are obtained from more than one bureau, which one
should I use?
Are
there other types of scores that can be used?
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Why
is the score on a report I ordered different than the
score another Broker ordered?
There
are several reasons this can happen. Creditors report
to the credit bureaus every day, therefore information
like balance and status may have changed. There may be
new entries or additional inquiries.
Another
reason is that there are different versions of Credit
Scoring Models. We believe in using the most current,
up to date versions.
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What
is a Credit Bureau Score, and how is it calculated?
Credit bureau scoring
is a statistical means of assessing how likely a borrower
is to pay back a loan. A Credit Bureau Score is
based on the data available in the borrower's credit report.
The score measures the relative degree of risk a potential
borrower represents to the lender or investor. it
is not a measure of a borrower's income, assets, or bank
account, although those and other factors may still be
considered by lenders and investors, independent of the
score.
Fair
Isaac Credit Bureau Scores range from approximately 300
to 850 points, and are available through the three national
credit data repositories (Equifax, Trans union, and Experian).
All of these three models are often referred to as "FICO"
scores. The scoring programs reside at these credit
bureaus and are called:
Beacon - an Equifax score
Empirica - a Trans Union score
Experian/ Fair Isaac Model - an
Experian score
This
score is calculated at the repository, and is based solely
on the data within that repository's individual credit
file. Fair Isaac is not able to access a borrower's
credit bureau data, make corrections to credit bureau
data, or calculate a score.
A
Fair Isaac Credit Bureau Score, sometimes referred to
as a FICO score, is calculated by a system of scorecards.
In developing these scorecards, Fair Isaac uses actual
credit data on millions of consumers, and applies complex
mathematical methods to perform extensive research into
credit patterns that forecast credit performance.
Through this process, Fair Isaac identified distinctive
credit patters. Each pattern corresponds to a likelihood
that a consumer will make his or her loan payments as
agreed in the future. The score is based on all
the credit-related data in the credit bureau report -
not just negative data such as missed mortgage payments
or bankruptcies.
The
types of credit information used in the credit bureau
scorecards are typically the same items an underwriter
would use to make a credit decision. These can include:
 |
Payment
history
- Public
record and collection items
- Severity,
recency and frequency of delinquencies noted in tradeline
section |
|
Outstanding
debt
- Number of balances recently
reported
- Average balance across all
tradelines
- Relationship between total
balances and total credit limits on revolving accounts. |
|
Credit
history
- Age of oldest tradeline
- Number of new tradelines |
|
Pursuit
of new credit
- Number of inquiries and
new account openings in the last year
- Amount of time since most
recent inquiry |
|
Types
of Credit in use
- Number of tradelines
reported for each type: Bankcard, travel and entertainment
cards, department store cards, personal finance company
references, installment loans, and other. |
Fair Isaac
observes a very large number of credit report histories
of mortgage borrowers to determine which credit report
items or combination of items are the most predictive
of future risk; this data indicates the amount each
item contributes to an accurate assessment of credit risk.
Fair Isaac
Credit Bureau Scores do not use race, color, religion,
national origin, sex, marital status, or age as predictive
characteristics. occupation and length of time in
present residence are also not used in the Credit Bureau
Scores. Also, any information that is not present
in a repository credit file is not used in creating a
Credit Bureau Score.
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Why
did this credit file receive the score that it did?
To understand
why a credit report scored the way it did, look at the
four reason codes returned with each score. These
are the top reasons, in order of severity, why it did
not score higher, although other factors probably contributed.
Mortgage brokers and lenders should receive these reasons
along with the score when the score is obtained through
a mortgage credit reporting company. A complete
list of these score factor reasons accompanies this document.
The reason
codes are either a number or a letter followed by a brief
description. For example a credit report with a
score of 563 may have the following factors:
02 - Delinquency on accounts
01 - Amount
owed on accounts is too high
09 - Too many
accounts opened in last 12 months
19 - Too few
accounts currently paid as agreed
These score
factor explanations can be relayed back to the borrower
to explain how they can increase their score over time.
Score factors are less meaningful for higher-scoring credit
records as they merely point to the reasons why the file
did not score even higher.
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How
can a borrower increase his or her Fair Isaac Credit Bureau
Score?
Over
time a borrower can improve the information in his or
her credit report by paying credit obligations on time
and using credit wisely. As derogatory data in the
credit report gets older, it has less influence on the
score. A missed payment from four years ago will
not count as much as a missed payment that is six months
old.
A credit
score, like a credit report can be thought of as a snapshot
of an individual's changing credit record. Scores
from different repositories will be different because
of the different data available in the consumers file
at each repository. If a request is made to obtain
another report in order to get an updated score, then
the score is likely to change for many reasons; however,
it is not possible to limit how that score will change.
The credit items on the report are updated often, so new
items are likely to have been added since the previous
report was generated. In addition, existing items
will have aged. Repeatedly requesting a borrower's
credit report may substantially increase the number of
inquiries on the repository report, which may affect the
score adversely.
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What
if a score if affected by derogatory credit information
that the borrower believes is not his or hers?
Consumers
who want to address what they believed is erroneous information
on a mortgage report should contact the credit reporting
agency which developed the report. The Fair Credit
Reporting Act (FCRA) allows the credit reporting agency
a "reasonable period of time" generally not
to exceed 30 days, to reinvestigate consumer disputed
items. a significant number of credit grantors use
an automated system for investigating disputes and respond
to the dispute within a few days. most credit reporting
agencies make a special effort to quickly resolve disputed
information affecting a mortgage decision.
Consumers
wishing to dispute items on their credit files with the
credit repository can do so thought the following numbers:
|
Equifax
- (800) 685-1111 |
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Experian
- (888) EXPERIAN |
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Trans
Union - (800) 888-4213 |
The credit score is generated using the credit information
at one of the three national credit repositories.
Therefore, changes made solely to the mortgage credit
report and no to the credit repository information will
not affect the score.
It is the
policy of many lenders and investors, including Freddie
Mac and Fannie Mae, that if gross inaccuracies appear
on the credit file, erroneous information can be documented
and the score disregarded. The applicant is not
required to go through the procedure of changing the information
at the credit repository for the purpose of altering the
credit score in these cases.
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If
the derogatory information is removed, how much will the
score increase?
Because
the score uses all the credit-related data on the credit
bureau report and takes into account compensating factors,
removing or changing one specific derogatory item will
not guarantee an increase in the Credit Bureau Score.
In some cases a change in the credit bureau report would
have little or no effect on the score. And because
there are multiple scorecards using complex mathematical
formulae at each of the repositories, it is not possible
to estimate how much the score will change if specific
derogatory information is removed from the single repository
report.
Again, it
should be stressed that erroneous derogatory information
on a credit file can be documented to compensate against
a low score. The lender can weigh all factors and
documentation provided by the borrower and may choose
to disregard the score. it is not required by most
lenders and investors that an applicant go through the
procedure of changing information at a credit repository
for the purpose of altering a credit score when erroneous
information is present.
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What would happen
to the score if an applicant were to pay off his or her
balances and/or close some accounts?
It
is not possible to ensure that scores would increase in
this case. Such actions may upset the mix of available
credit, and actually decrease the score. It is important
to remember that the point of the scoring is not to calculate
an up-to-date debt ratio - the debt ratio is still considered
by the lender independent of the score. Therefore
it is not critical that balances be completely up to date
for the purposes of scoring. The score reflects
data available on the credit report to assess the consumer's
current payment patterns as well as payment history.
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Do
inquiries affect the credit bureau score?
The
number of inquiries may or may not be a factor in the
score, and when it is a factor, it is typically not a
strong one. However, if a borrower is very close
to the score threshold, and can show that there are one
or more inquiries that are related to this particular
loan process, and the number of inquiries appears as one
of the four reason codes, then the lender may be able
to make an exception for the borrower. It is up
to the lender, as in all circumstances, to decide what
is a sufficient risk.
Since
the law requires a record of all inquiries into the file
to be kept, inquiries cannot be removed from the credit
report. Inquiries that occur from a consumer requesting
their own credit file are not used in determining the
score. also inquiries that are incurred when lenders
access consumer credit files in the process of pre-approved
credit solicitations or for managing existing accounts
are not used by the score.
Occasionally,
a consumer in the market for a new loan may have their
application presented to a number of lenders in a short
period of time, resulting in multiple inquiries.
This practice, known as "shot-gunning." is prevalent
in the auto industry and results in a large number of
recorded inquiries for a single application for new credit.
Similar occurrences have been observed in the mortgage
origination process. Fair Isaac has taken this practice
of "shot-gunning" into account when considering
inquiries as a predictive factor. To minimize the
impact of dealer "shot-gunning" as well as situations
when the consumer or consumer's mortgage broker "shops"
multiple lenders for credit, all auto and mortgage related
inquiries occurring over a 14 day period are treated as
a single inquiry. In addition the credit bureau
risk models use an "Inquiry Buffer". With
the introduction of an inquiry buffer, all mortgage and
auto related inquiries that occur within 30 days of the
time of scoring are ignored.
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Should
the credit score be passed on to the borrower?
Because
there are different types of scoring models on the market
that have different scales, a score by itself has little
meaning to the borrower. In addition, a lender can
establish score cut-offs at any point along the score
range; therefore, the interpretation of the core in terms
of loan approval is relative to each lender's individual
business strategy. Because there is no point of
reference for a borrower to understand his or her individual
score, it should not be passed on.
When a consumer
is declined credit due to a low score, the score factor
codes should be communicated to the consumer. Providing
the score alone as the reason for declination does not
provide the consumer with actionable information that
can e used to increase their score over time, and is not
in compliance with Regulation B of the Equal Credit Opportunity
Act.
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Why
can't some files receive credit bureau scores?
In
order to receive a Fair Isaac score, a credit bureau file
must contain at least one account that is older than six
months, and at least one account that has been reported
to the credit bureau within the past six months.
Both conditions can be met by the same account, and a
bureau file containing just one account can get a Fair
Isaac score. In addition to these credit conditions,
the bureau file must not contain any indication that the
consumer may be deceased.
If you are
requesting a credit score on one or more credit repository
files used to create a merged report or RMCR, and a score
is not returned, you must verify that the credit conditions
(e.g. at least one account that has been reported in the
last six months and open longer than six months) have
been met on the file generated by the scoring credit repository.
your mortgage credit reporting company, or the repository
in question, will be able to help you with this verification.
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What
does a score mean?
A
Fair Isaac Credit Bureau Score is a means of rank-ordering
potential borrowers based on the likelihood that they
will pay their credit obligations as agreed. A higher
score indicates better credit quality. If all other
things are equal, borrowers with a score of 660, for example,
are less likely to default on a loan than borrowers with
a score of 650.
The Fair
Isaac Credit Bureau Score models at each credit repository
are of similar design and the scores are scaled to indicate
a similar level of risk across all three bureaus.
In other words, a score of 680 at one bureau will represent
the same relative risk as a score of 680 from another
bureau. This risk is defined in terms of the number
of accounts that remain in good standing compared to those
that default.
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Doesn't
using the score mean fewer people will get mortgage loans?
No, in
fact the opposite may be true. Credit Bureau Scoring
is just one of several ways that lenders and the secondary
market decide whether to lend someone money, and under
what terms. Lenders or investors set the underwriting
guidelines. The investor typically sets score cuts-offs
such that they offer mortgage loans to the same number
of borrowers irrespective of the use of scoring.
The lender
used the Credit Bureau Score to determine if the borrower
exceeds the acceptable level of risk for the product being
offered. If the score on a borrower's credit report
is too low for a given product, that does not mean the
score is too low for other products. In the past
we have seen that once lenders are able to accurately
identify the credit risk of all applicants, they can create
products designed and price for various market segments,
ultimately extending credit to more people.
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If
Credit Bureau Scores from more than one bureau are obtained
on a mortgage credit report, which score should I use?
Each
credit file at each repository is capable of being scored.
If a mortgage credit report is created using files from
all three repositories for a borrower, it is conceivable
to have three separate credit scores. Freddie Mac
has recommended that a lender rely on the middle score
when working with three scores or the lowest score when
using two scores. Some lenders or investors may
require a credit score from a specific credit repository
based on the perceived strength a repository may have
in a geographic region.
Borrowers
and co-borrowers will also have separate scores.
When considering which score will be the basis of a credit
decision, Fair Isaac suggests that a lender rely on the
same logic used currently to determine which of the two
credit files is used. A typical and conservative
approach is to use the lower of the two so that both the
borrower and co-borrower meet minimum credit criteria.
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Are there other types
of Credit Bureau Scores that can be used in the mortgage
industry?
Yes,
In a recent industry letter, Freddie Mac made reference
to two types of credit scores that correlated strongly
with mortgage performance. these were the "bureau
scores" created by Fair Isaac as well as the "bankruptcy
scores" created by CCN-MDS. Both of these types
of scores are available through the three national credit
repositories. Fannie Mae issued a similar industry
letter which only referenced Fair Isaac Credit Bureau
Scores. Fair Isaac is not able to comment on the
specific details of the CCN-MDS bankruptcy scores; therefore,
this material refers only to the Fair Isaac Credit Bureau
Scores.
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