Obama Inflates FICO Credit Scores to Fuel Lending

Paul Sperry, Investor's Business, Daily, August 13, 2014

Known as the gatekeeper of consumer credit, Fair Isaac may be losing that role to federal regulators and activists eager to reopen the floodgates on lending to shaky borrowers.

Bowing to pressure from Washington, the San Jose, Calif.-based Fair Isaac has agreed to tweak its widely used credit-risk scoring model to give a break to consumers with debts that have gone into collections.

The unprecedented move follows months of talks with Obama administration regulators, who have charged that the firm’s FICO credit score inaccurately portrays many low-income and minority consumers as credit risks and denies them access to loans and credit cards.

The lower weight that FICO will now give unpaid medical debt, for instance, could boost some affected borrowers’ score by 25 points or higher, potentially making them eligible for loans previously denied.

A subprime borrower has a FICO score of 660 or lower.

While inflating credit scores will make it easier for tens of millions of Americans with subprime credit today to now get mortgages and other loans, it also threatens to inject major risk into the financial system just six years after the devastating credit crisis.

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First introduced in 1989, the FICO credit-risk score evaluates a borrower’s creditworthiness based on bill-paying history and several other objective factors. It’s viewed as the most trusted credit-bureau risk score, factoring into some 10 billion lending decisions a year. A large body of research has found FICO scores to be the most accurate predictors of default.

That’s why 90 of the largest 100 U.S. financial institutions rely on it. FICO scores, moreover, are the required credit risk underwriting standard for all FHA-insured loans, as well as all mortgages sold to Fannie Mae and Freddie Mac. In the run-up to the crisis, however, Washington regulators pressured institutions to overlook credit scores as part of a crusade to expand homeownership.

After months of meetings with the powerful new Consumer Financial Protection Bureau, FICO agreed that it would no longer count as points against credit scores delinquent medical debt or any debts that go to collection agencies and get repaid.

Obama regulators argue that it’s important to insulate consumer credit scores from medical debt, for one, because such bills are “unexpected.”

Critics call that distinction a slippery slope, arguing that under such reasoning, delinquent debt from losing a job or crashing a car might also be excluded from credit scores.

{snip}

In 2012, CFPB Director Richard Cordray announced from Detroit that the government would, for the first time, start policing the $4 billion credit reporting industry in response to activists’ complaints of rampant errors and racial bias.

The bureau opened up a complaint line and portal for consumers with damaged credit, followed by on-site examinations at Experian, Equifax and TransUnion. Examiners ordered the agencies to turn over data about their methods and practices.

Then the CFPB released a study claiming that less than 80% of credit reports are accurate, which in turn triggered an avalanche of stories in the press casting doubt on the veracity of credit scores.

In fact, a major 2011 study by the Policy and Economic Research Council found that 98% of reports contain no material errors. Also, a 2007 Federal Reserve study found no racial bias in credit scoring in a national sample of more than 300,000 credit bureau records. It found, if anything, that scores typically underestimate the risk posed by African-American borrowers, who “show consistently higher incidences of bad (loan) performance than would be predicted” by their FICO scores.

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  • http://countenance.wordpress.com/ Question Diversity

    There’s grade inflation. Why not credit score inflation?

    Nothing is too good for Africanus Bellcurvius. Including whole suburbs.

  • phorning

    It is impossible for the credit reporting agencies to have a racial bias as they are unaware of your race. If the CFPB isn’t ended by the next President the credit bubble that caused the last economic downturn will be nothing compared with the next one.

  • willbest

    Speaking as somebody that fairly familiar with residential rentals, whether or not somebody has unpaid student loans or medical debt has a dubious relation to whether they pay the rent in full and on time. I can’t imagine it being less likely to happen when they are committing additional resources.

    It is likely without all the Federal intervention that banks would do something similar to what car financing companies do which is discount them on their own, however, the Feds strictly control what Fannie and Freddie can do and that then sets the market for everybody else.

  • Luca

    Lowering the bar on credit worthiness? Seems I’ve heard that song played before and it ended on a really bad note called the Housing Bubble of 2006. Same story; lending money to minorities who can’t fathom the concept of personal responsibility.

    Gee, I wonder if we’ll get the same outcome?

    • TruthBeTold

      I’m beginning to suspect they are willfully promoting these ‘bubbles’ just to get money into the pocket of un-credit worthy people.

      WE, the tax payers, will pay for it later.

    • Georgia Boy

      I have no sympathy at all for the credit bureaus or the health insurance companies, and not much more for the American sick care system. I was in a motorcycle accident a couple of years ago and had a devil of a time getting the claims settled, and I’m employed with one of the largest and best employers in my area. At one point almost a year after the accident I came within a couple days of being placed in collections myself because the ins. company kept arguing with the hospital. I had to agree to start making monthly payments on the bill I didn’t owe to avoid them torching my credit. Whatever flak BHO gave them they probably deserved worse. NEXT!

      • Luca

        He’s in bed with the insurance companies, don’t kid yourself.

  • Usually Much Calmer

    ‘Obama regulators argue that it’s important to insulate consumer credit
    scores from medical debt, for one, because such bills are “unexpected.” ‘

    For those with poor future-time-orientation, almost everything is “unexpected”.

    This is my feel bad story of the year. Hang my head and cry worthy.

    • Nancy

      “For those with poor future-time orientation, almost everything is “unexpected”.

      My laugh-out-loud moment for the day, thank you.

      It actually called to mind every Bantu who ever got below a 70 percent on a test in my class. They’d look absolutely incredulous…about as surprised as they were the moment they realized the test (which I’d been reminding them of every day for the past two weeks) was actually THAT DAY.

      You know how to spot the Bantus with decent future-time orientation on Test Day?

      They were absent.

  • dd121

    Last time the libtards did this the economy melted.

  • TruthBeTold

    Anyone want to place bets as to when this ‘bubble’ bursts on the public, credit card companies, banks, and businesses?

    Clearly they are ignoring (or willfully flaunting) loans to unqualified borrowers. Maybe that’s the strategy all along. Just get money into the pockets of the un-credit worthy and let the government bail out the banks later.

    • Usually Much Calmer

      If you are cynical and interested in endgame theories of US monetary policy, you might enjoy a site called zero hedge. (Or you might not.)

  • http://saboteur365.wordpress.com/ bigone4u

    Obama is doing a better job of sabotaging the financial system than an enemy ever could. Good for him. The sooner it collapses, the sooner we can start building our white nation.

    • connorhus

      No reason for our enemies to even get involved as you point out. Never interrupt your opponent when he is making a mistake.

  • MBlanc46

    They just never learn, do they?

    • IstvanIN

      African magical thinking combined with Marxism. Neither works and combined they are deadly.

    • Augustus3709

      Crazy like a fox maybe.

      This does not benefit minorities at all. They will just be sucked into more debt. This lends to the theory that the big-business interests are behind all this social strife.

      They say blacks are terrible with money. They’re a lender’s dream come true. Get rid of the Protestant Work Ethic type Whites who delay gratification. They make a harder score. No, ship in the dark folks who don’t know any better.

      • Jacobite2

        Minorities who could never qualify for a home-loan will get a home. No lender will be able to reject them, without a visit from Trayvon Holder’s tribesmen. After the borrowers stop making payments, they’ll be able to live in the house for years, until the process of throwing them out winds it’s way through affirmative-action court; then they’ll level the house on their way out. Bank customers, Euro-American loan applicants, and eventually taxpayers will help foot the bill. We’ve actually seen this whole thing before, in 2008, and they want another go-round because the folks who end up holding the bag are Euro-Americans who pay their bills and try to save for retirement. Meanwhile more and more small mortgage lenders will go out of business or be gobbled up by the big boys, who live and breathe under Government overview, and can afford all the red-tape, regulation, and lawyers. Big government loves big business..

        • Augustus3709

          Unfortunately I tend to agree. However, whatever strain the minority privilege puts on White people, those minority communities themselves will continue down the road of dysgenics to an even more pathetic and laughable state.

          It should be the focus of White folks to avoid as much as possible the collateral damage caused by further minority implosion.

          • Jacobite2

            When wh*tes become just another minority, any implosions are likely to be very dangerous. Dysgenics is bad, but failure to reproduce is worse.

  • Augustus3709

    That’s interesting, I’ve never seen “Credit-Score” written as “Credit-Risk Score”.

    That is revealing as to who it really exists for, namely the loaners, not the people being sucked into usury.

  • De Doc

    History repeats itself yet again.

  • HamletsGhost

    Exactly correct.

  • Paleoconn

    The housing bubble wasn’t enough of a lesson. Our government was once virtually tolerable when it was merely useless. Now, when it is harmful in every thing it touches, a reckoning may be on the horizon.

  • none of your business

    I can see where this is going. It will be just like affirmative action, first add 30 or 40 or 50 points to a job aptitude exam score so blacks can pass. Then eliminate the aptitude exam completely, even the typing test or requirement that delivery critters have a valid drivers license or police officers be of normal weight for their height. After the Rodney King riots Los Angeles hired an affirmative action police chief who was about 80 pounds over the top
    weight limit. LAPD uniforms come in 5 sizes from xtra large to xtra small. They had to make his uniforms from scratch. He also could not carry a pistol as is required by all LAPD officers because he had never passed the POST police officers standards and training exam. He had been a Philly cop and police chief for 30 years and never passed that exam. He was given intensive tutoring when given the chief’s job in Los Angeles but after 5 years of tutoring was unable to pass the POST exam.
    80 pounds over weight and unable to carry a gun because he could not pass the POST exam after 30 years as an officer and chief in Philly and Los Angeles.
    Soon they will be passing out credit cards and mortgages at the welfare offices and homeless shelters.