FICO scores were developed by Fair Isaac & Company, Inc. for each of the
credit repositories. The scores are: (Equifax) Beacon, (Experian formerly TRW)
Experian/FICO and (TransUnion) Empirica. They are simply repository scores
meaning they only consider the information contained in a person's
credit file; they do not consider a persons income, savings or
amount of a down payment for a mortgage.
The scores were designed to assess risk. They are useful in directing
applications to specific loan programs and to set levels of underwriting, i.e.
streamline, traditional or second review. The scores are objective, consistent,
accurate and fast.
Many people in the mortgage business are skeptical about the accuracy of FICO
scores. Scoring has only been an integral part of the mortgage process in the
past few years; however, the scores have been in use since the 1950's by retail
merchants, credit card companies, insurance companies and banks for consumer
lending. The data from large scoring projects emphasizes the accuracy, the
predictive quality of the scores. Large portfolios have been scored for mortgage
servicing and investment groups, and again, they demonstrate that FICO scores
The scores were developed from each repository's database using actual loan
performance. A sample of over 750,000 consumers per repository was used. The
repositories have each made great strides to increase the accuracy of their
respective database through computer technology and internal monitoring. There
is a new standard reporting format for credit grantors to use when sending
electronic information to the repositories; this is the critical first step to
providing accurate data.
The scores use a multiple scorecard design. Each repository uses 10
individual scorecards, and the models at each repository are the same. This
increases accuracy and optimizes the predictive variables for each
subpopulation. (For example, a borrower with two 30-day late payments will be
scored against a population with some minor delinquencies.) This feature may
cause a borrower with delinquencies to score in the same range as a borrower
without delinquencies. Scorecards are reviewed and updated every twenty-four
The actual scoring process is proprietary, and the algorithms are
copyrighted. We can share the predictive variables, the portion of the credit
file considered and the weight as provided by Fair Isaac. They are:
- Previous credit performance (35%)
Trade line information specific to payment history
- Current level of indebtedness (30%)
Current balance compared to the high credit
- Time credit has been in use (15%)
- Types of credit available (15%)
Installment loans, revolving accounts, debit accounts
- Pursuit of new credit (less than 5%)
FICO has changed the way it factors credit checks, inquiries. These changes
should minimize the "negative" effects that aggressive rate shopping or the
normal mortgage process can have on a mortgage applicant. In the new Beacon
version, the deduping process has been expanded beyond seven days. One variable
counts the number of days within 365 days of scoring. If there has not been an
inquiry, the deduping mechanism is not activated. If there is a consumer
originated inquiry within the past 365 days from mortgage or auto related
industries, these inquiries are ignored for the first 30 calendar days from
scoring; then, multiple inquiries within the next 14 days are counted as one.
Each inquiry will still appear on the credit report.
Scores should not change significantly because the variable in the model
using inquiries contributes less than 5% of the predictive power of the model.
According to Equifax statisticians, an average of 5% of the credit reports in
the Equifax consumer credit reporting database (over 200 million consumer files)
will see a change in score due to this. Fewer than 5% of those will see a change
significant enough to effect a loan decision.
In order to get a score a borrower must have the following conditions in
- No "Deceased" indicator on the credit file
- At least one undisputed trade line that has been updated in the last six
- One trade line open at least six months
Scores range from 350 (high risk) to 950 (low risk). A scorecard of 660 will
be 660 on Beacon 96, Empirica and Experian/FICO if the data on each file is the
same. However, each repository is likely to contain different data.
Every score is accompanied by a maximum of four reason codes. Reason codes
identify the most significant reason that a consumer did not score higher. They
are not red flags. Consumers with scores in the 800 range get reason codes just
as consumers with scores in the 500 range. The reason codes may be used in
describing to the consumer the reason for adverse action. Scores are not part of
the credit file and are not covered by the Fair Credit Reporting Act. Scores, if
disclosed to the consumer, must be related to the credit file - using the reason
codes - since the score has no meaning in itself; the meaning or risk level is
assigned by the lender and the investor.
When applicants have erroneous information reported, document the
inaccuracies. The easiest way to do that is to have your credit-reporting agency
upgrade the merged in-file to an edited mid-range report or to a Residential
Mortgage Credit Report. With the upgraded report, you can ignore the
score! The file will have to be handled in a traditional manner for
underwriting and investment purposes. The developed report will provide the
paper trail that investors want.
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