Blog sponsored by Bankrupt-Law.com


April 14, 2006

By COCO SALAZAR

Concerns about adapting to the new credit scoring system recently
announced by the three credit bureaus were addressed by a panel that
included representatives from one of the bureaus and a major subprime
lender.

The teleconference panel members included Experian representatives Steve
Robles and Chuck Robida and New Century Mortgage Senior Vice President
Bill McKay.

While Experian, TransUnion and Equifax have traditionally used slightly
customized algorithms based on software developed by Fair Isaac and Co.,
the VantageScore reportedly shares a single methodology created by the
bureaus to formulate credit scores.

But despite use of the same structure for data interpretation and a
scoring algorithm, VantageScore results will still produce three scores
that may vary due to data differences in a consumer's credit file at
each of the bureaus, said Robida, Experian director of analytics and
part of the team that developed the new model.

Robida said VantageScore was created to provide an alternative to
existing scores, not a replacement, and that it is a better predictor of
credit risk and should provide more consistent results between the
bureaus due to the shared scoring model.

More consistency across the three scores within the mortgage industry is
"specifically important" because it is one of the few industries that
pulls the three scores and has the challenge in making a decision on how
to interpret the scores, whether taking the highest, middle or lowest
score, he added.

A factor aiding in more consistency is that VantageScore reduces or
eliminates the weight of credit inquiries from the score, Experian said.

The new scoring model differs in that it provides scores ranging from
501 to 990, compared to Fair Isaac's 300 to 850 range. VantageScore's
range intends to make it easier to identify score ranges as good or poor
because they mimic traditional letter grade ranges of "A" through "F,"
where an "A" would be achieved for a score of 901 to 990 and "F" would
be for a score of 501 to 600, Experian said.

Ron Litt, president of Advantage Credit -- which hosted the
teleconference, worried that the letter grade system would make
borrowers uneasy, as an "F" would indicate their credit flunked.

Experian said, however, that letter grades will not be delivered with
the score.

Unlike FICO models that use scorecards but do not reveal them, the new
model delivers borrower's "scorecard" data -- one of 12 borrower
groupings that impact scores. Scorecard groups include prior
bankruptcies, high and low risk groups and others. This is done to
diminish confusion with brokers and consumers when scores appear
inconsistent, according to an announcement by Advantage Credit.

VantageScore also delivers four scoring factors that explain to
consumers the reasons for their score and what they can do to improve
it. Wording of adverse action reasons is detailed, such as explaining a
consumer had a recent mortgage delinquency or high credit card balances,
to enhance consumer's understanding of the score. This four scoring
factors are delivered even to people with high scores, Experian said.
Current models deliver scoring factors, but many files draw fewer than
four and no instructions are given so as to how consumers can improve
their scores.

Technology change costs and retraining time were cited by teleconference
participants as roadblocks to adoption, while New Century's McKay
predicted that acceptance by the secondary market would be the primary
determinant of whether lenders and brokers use the product.

Experian said it was in the process of setting up meetings with Fannie
Mae and Freddie Mac to inform them about the new scoring system and to
try to fulfill some testing.

"We're hopeful that they'll accept the score or try to enable the market
to use another score in addition to the scores being used now," an
Experian representative said.

The credit bureau reps additionally noted that it will continually be
educating about the new score and will develop more information to help
brokers and consumers better understand it.

"There is substantial interest in the financial services industry for
the new score, but I think we all need to realize simply for these major
lenders to flip a switch and turn it on, it's going to be more
complicated than that," Robida said. "There's testing to be done, they
need to assess what the impact will be in terms of their business in
terms of do they accept and decline and the rates that apply. It will be
an ongoing process."

Advantage Credit said its customers were concerned on whether they'd
have to adapt to the new score very quickly, without preparation or
alternative.

"None of the brokers are in a situation where ... tomorrow they have to
figure out what to do with the new VantageScore, [the change] will
certainly be more gradual than that," Robida said.

The pace of adopting the new score within the mortgage industry will be
determined by lenders, as well as the secondary market, as they will
evaluate "whether or not the changeover costs are small relative to the
advantage of the score in terms of how many loans they can approve," he
added.