1. Do you understand how FICO is developed, and do you know what
factors (ingredients) are incorporated in the score?
Answer: FICO scores or credit scores are produced by private corporations
such as the Fair Isaac Corporation, Equifax, Experien and TransUnion. These
scores are proprietary. Fair Isaac Corporation develops models that evaluate
certain factors to produce a FICO score. Those factors are available for free to
the public and include: payment history, amounts owed, length of credit history,
new credit and types of credit used. How these factors are weighed and
considered within the model is proprietary and therefore, not disclosed to
mortgage lenders.
2. If so, can you share that information?
What is your understanding of what you are allowed to do with the
information contained in the credit report and, separately, of the score
that you receive from the credit bureaus?
Also, how much do you pay the major credit reporting agencies per
report? Is it as much as the approximately $29 consumers would have
to pay for both the credit report and credit score?
JUL 29 2003 15:55 FR MORTGAGE BANKERS ASSO
Mortgage lenders and credit reporting agencies (CRAs) enter into contracts for the sale of credit reports. Both parties negotiate the cost of the credit reports based on the volume required by the lender. Therefore, the cost per credit report varies between lenders.
The contracts between lenders and CRAs may contain provisions that prohibit
the lender from disclosing the contents of the credit report, which would include
the credit score. The Fair Credit Reporting Act requires that when a lender takes
an adverse action against a consumer, the lender must provide a notice to the
consumer including the name and the address of the CRA that supplied the
credit report and a statement that the consumer is eligible for a free credit report
from that CRA.
Lenders may notice discrepancies on credit reports. Lenders are generally not in
a position to investigate or correct discrepancies on a credit report that are
unrelated to the lender. In this situation, the lender recommends that the
consumer contact the CRA for assistance since the CRA is in a better position to
respond.
UNDER THE SECTION "FOR WELLS FARGO"
Request that all on panel 1 answer the question below.
4. Do you currently provide all kinds of financial services in California?
How would pending California law impact members of the Mortgage
Bankers Association? How would it impact members of the Mortgage
Bankers Association?
Answer: Members of the Mortgage Bankers Association (MBA) certainly
provide a variety of services to consumers in California and around the country.
Affiliate sharing enables our members to offer innovative products to consumers
cheaply. Further, consumers can take advantage of a wide range of products of
which they may not have been aware,
If California law were adopted and required consumers to "opt-in" to affiliate
sharing, the amount of available consumer information would greatly decrease,
placing a significant obstacle to a consumer's awareness of new and innovative
products. Further, the loss of business that industry would endure would
invariably raise the cost of credit - a result that would be bad for consumers and
the economy.
In addition, the MBA supports consideration of a national uniform privacy
disclosure notice. Experts agree that current privacy notices should be
simplified, shortened and standardized. Permitting states to pass disparate laws
related to the form and content of disclosures could result in consumer confusion.
Further, the cost of complying with fifty sets of laws would be exorbitant and likely
increase the cost of credit.
JUL 29 2003 15:55 FR MORTGAGE BANKERS ASSO
5. Do you agree with Chairman Greenspan that all of the seven exceptions
to the Fair Credit Reporting Act should be reauthorized this year? If so,
why? If not, why not?
Answer: MBA agrees with Chairman Greenspan.
The Fair Credit Reporting Act (FCRA) plays an important role in our nation's
successful mortgage market and high homeownership rate. FCRA creates a
structure that produces reliable consumer information that is used to lower the
cost of homeownership, offer the dream of homeownership to underserved
markets, and produce innovative mortgage products. It is imperative to the
continued rise of homeownership rates and to access to credit that Congress
reauthorize the seven areas preempted in the FCRA in their current form and
maintain the national uniform standard of credit reporting. The national uniform
standard is important for consumers and the mortgage industry because it gives
rise to the following circumstances:
⚫ It enables Americans to move to new states and purchase homes with
relative ease;
Lenders are able to originate loans on a national level increasing
competition, thereby lowering the cost of credit to consumers;
Mortgage lenders underwrite loans using automated underwriting systems
that provide a quick response to a mortgage application. Automated
underwriting systems are facilitated by the national uniform standard of
credit. Reprogramming these automated underwriting systems to comply
with inconsistent and fragmented state laws will surely increase the cost of
credit;
A mortgage lender can take a successful program or product in one state
and implement it in another state allowing those consumers to benefit from
it, and
• Credit reports have become reliable measures of an applicant's
willingness and ability to pay.
Consumers could loose out on taking advantage of the financial benefits FCRA
creates if the seven areas preempted in FCRA are not reauthorized. MBA
supports reauthorization to permit continued homeownership growth, which
increases personal wealth and promotes a strong economy.
TransUnion Response to Congressman Hinojosa's Questions on the FCRA
Do you understand how FICO is developed, and do you know what factors (Ingredients)
are incorporated in the score?
First, It's important to note that FICO is a company (Fair, Isaac), not a product. FICO, like
TransUnion and many others, develops scoring models that are used by a variety of industries to
predict the likelihood of a specific behavior. While these scores are often used by credit grantors
to make fast, reliable decisions at the point of contact with a consumer, they are more frequently
used as one component in a complex decision making process.
In response to your question, I will focus on scores developed for use by the credit industry
The credit industry uses various types of credit scores to assess risk for different types of credit.
For example, a creditor may use one type of score when assessing risk for a credit card account,
and another type of score when assessing risk for a mortgage account and still another to better
predict bankruptcy risk, credit usage, tendency to respond to offers of credit, etc.
A credit score is an objective "snapshot" of the consumer, representing the consumer's
creditworthiness as a number, which is calculated from information that may or may not be
derived from a credit report on the day the score is output. For example, many credit scores use
consumer financial information not contained in a credit report summary of that information, such
as income history, total assets, and total liabilities. Numerical weights are placed on different
aspects of the consumer's credit report or other relevant information and a mathematical formula
or computation is used to arrive at a final score.
Federal regulations are in place to ensure the fair application of credit scores. One of the most
important of these is Regulation B, which, among other things, requires that credit scores not
discriminate based on categories such as race, gender, and age.
Credit Score Design – Credit bureau scores are composed of characteristics, attributes and
points resulting in a score. The score, usually three or four digits, is associated with specific
performance outcome. For example, a score may predict the odds that an individual will go
delinquent, or it may predict the amount an individual is likely to repay on a past due balance. A
characteristic is a predictive element of a credit report, such as "number of delinquencies." An
attribute is the value of a specific characteristic. For example, if an individual has four
delinquencies on their file, the attribute for the characteristic “number of delinquencies" would be
4. Points are assigned based on the relative importance of the attribute in predicting a given
outcome.
How is a credit score calculated? To calculate a score, numerical weights are placed on
different aspects of a consumer's credit report and a mathematical formula is used to arrive at a
final credit score. TransUnion calculates a credit score based on many factors of a consumer's
credit history and payment behavior, including the public record, collection, tradeline, and inquiry
sections of the credit report. These many factors may include, but are not limited to:
· How a consumer is paying their accounts
· How much money the consumer currently owes
• How long the consumer's accounts have been open
What different types of credit the consumer uses
How much credit the consumer uses compared to the amount of credit the consumer has
available
How often and how recently the consumer has applied for credit
TransUnion Response to Congressman Hinojosa's Questions on the FCRA
The development of a credit-based model can be done in various ways. In general, the process is as follows:
1. Obtain a sample representative of the population that will be subjected to the model.
3. Calculate the observation, or predictive, characteristics to be analyzed in the development of
the model. These characteristics should reflect some time period prior to the performance of
the accounts.
4. Using the mathematical or statistical methods of choice (ie, chi-square, ratios, information
values, etc.), choose eligible variables for the development of the algorithm/score
5. Again, using the mathematical or statistical methods of choice (ie, linear regression, logistic
regression, etc.) calculate the attributes and points most predictive of the outcome being
predicted.
6. Apply the resulting model against a “holdout" population to ensure the model's ability to
perform on a population different from the sample used for its development.
Once the score has been developed, it should separate the "good" accounts from the "bad" ones. It should also exhibit rank-ordering, where an increase in the score represents a higher or lower likelihood of being good or bad. In general, the higher the score, the better the risk (meaning the higher the likelihood of being good).
How often does a credit score change? Credit files continually update with new information
from creditors. A credit score is calculated based on the information contained within a
consumer's credit file at the time the credit score is calculated. Therefore, a credit score can
change every time the information in a credit file changes.
How do inquiries impact a credit score? An inquiry is recorded on a credit report every time the consumer, one of his or her creditors, or a potential creditor obtains a copy of his or her credit report. A common misperception is that every inquiry decreases a consumer's credit score a certain number of points. This is not true. Typically, the presence of inquiries on a credit report has only a small impact on a credit score, while certain types of inquires have absolutely no impact on a credit score. The consumer's inquiries and prescreen inquiries never count in scores because they are not disclosed on credit reports; they are disclosed only the consumer. Inquiries generally have less importance than delinquencies, balances owed, and the length of time a consumer has used credit. Inquiries are usually more important on a credit score if a consumer has a limited credit history.
How can a credit score improve? Maintaining a good credit standing and continuing to exhibit
responsible credit behavior are the best ways to ensure that consumers are presenting the most
positive picture of their credit worthiness. Improving consumers' credit standing and their credit
score is not a one-time-fix; they must change how they view and handle their credit over time.
2. If so, with whom can you share the information?
In general, credit scoring models are customized, are treated confidentially and cannot be shared outside the boundaries of a customer/supplier relationship. As noted above, there are hundreds of credit scores used for many aspects of risk assessment. Each credit grantor that uses credit scoring has different risk tolerances, target customers, rating programs, tier placements, and places different weights on factors in a credit report.
What is your understanding of what you are allowed to do with the information contained
in the credit report and, separately, of the score that you receive from the credit bureaus?
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