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consumer in order to extend credit, but only a copy of their credit report. A consumer credit report also enables consumers to apply and qualify for credit via the internet from out of state lenders.

It is imperative that reliable credit reports be made available to mortgage lenders and financial service providers in general. The credit report is a fundamental tool that permits us to evaluate an applicant's ability and willingness to pay. State laws that make it more difficult to determine the true risk of an applicant would reduce the value and reliability of credit information, thereby increasing the cost of credit.

C. Affiliate Sharing:

Another important part of the national standard relates to affiliate sharing. The FCRA allows consumer information sharing between affiliates of the same corporate family. Through cross-selling products, information is shared with consumers educating them about the availability of certain products that they may be interested in. A customer can take advantage of offers of credit that they would otherwise be unaware of, to improve their financial situation. A customer can exercise the right to opt out of this information sharing and mortgage banking companies take great care in disclosing and honoring this request. Affiliate sharing is an important and inexpensive way for consumers to access credit and for industry to learn about consumers and expand their customer base.


Many Americans today own their own home and many have refinanced their mortgage. To do so, many American consumers may have responded to an advertised product received in the mail. They may have applied online or sat down with a loan officer, filled out an application and received word within hours about whether their application was accepted. These consumers may have never met the loan officer before and they may have applied in a state to which they just moved. In either case, these consumers were able to buy a home or refinance a mortgage with great speed. Without a national standard established under the Fair Credit Reporting Act, in its current form, this would never have been possible.

I am here today to ask that Congress maintain the national uniform standard of credit reporting for consumers, for lenders and for the economy. By reauthorizing and making permanent the preemptions, the mortgage industry can continue to gather information about consumer credit behavior and utilize it in such a way to offer more Americans the dream of homeownership.

Thank you again for inviting the Mortgage Bankers Association of America to testify before you today. MBA would be happy to furnish you with any additional information you may need. I am happy to answer any questions.

Written Testimony


Allen J. Fishbein

General Counsel

Center for Community Change

BEFORE THE FINANCIAL SERVICES COMMITTEE Subcommittee on Financial Institutions and Consumer Credit U.S. House of Representatives


"Fair Credit Reporting Act:

How it Functions for Consumers and the Economy"

June 12, 2003

Center for Community Change
1000 Wisconsin Avenue, NW
Washington, DC 20007

Fax 202-298-8542

My name is Allen Fishbein. I am General Counsel of the Center for Community Change. I want to thank Chairman Bachus, Rep. Sanders, and other members of the Subcommittee for inviting me to testify today at this hearing on the "Fair Credit Reporting Act: How it Functions for Consumers and the Economy.” My testimony will focus this morning on issues pertaining to the impact of credit scoring and automated underwriting in providing fair access to mortgage credit.

The Center for Community Change (CCC) is a national, non-profit organization, headquartered in Washington, D.C. For over 35 years, CCC has been an important source of technical assistance, training, and advocacy on behalf of local community organizations working to improve the conditions in low-income and predominately minority communities across the nation. A key component of our work has been devoted to assisting local efforts across the nation aimed improving the flow of responsible mortgage credit to families living in underserved neighborhoods. CCC also released a national study last year entitled, “Risk or Race: Racial Disparities and the Subprime Refinance Market," ( that details the disproportionate rise of subprime mortgage lending to minority households and neighborhoods.

My own work in this area spans over twenty-five years in providing technical assistance to local groups and advising lenders and government regulators. I also served for at time as Senior Advisor to HUD for Government Sponsored Enterprises Oversight and on several advisory bodies relevant to today's hearing, including the Federal Reserve Board's Consumer Advisory Council, the Fannie Mae Housing Impact Advisory Council and the Freddie Mac Affordable Housing Advisory Council.

In 1969, during the debate on the original Fair Credit Reporting Act (FCRA), Sen. William Proxmire spoke of the congressional intent behind the law: "The aim of (FCRA) is to see that the credit report system serves the consumer as well as the industry. The consumer has a right to information which is accurate; he has a right to correct inaccurate or misleading information, (and) he has a right to know when inaccurate information is entered into his file ... The Fair Credit Reporting Act seeks to secure these rights."

Referring to this legislative intent, William N. Lund, with Maine's Office of Consumer Credit Regulation stated last year, “... just as the FCRA de-mystified the storage and use of credit information, credit scoring is now serving to re-mystify that process."

I share the regulator's concern. The rapid growths in the use of credit scoring and related technologies have worked to improve access to credit for many, particularly in mortgage lending. However, it also has added an additional veil of secrecy over the credit decision-making process. This veil has created uncertainty and suspicions among consumers about the role that these scoring technologies play as gatekeepers for

obtaining credit. Lifting this veil, particularly in the mortgage lending arena is long overdue, but it is likely to require Congressional action to achieve.

What is credit scoring?

Credit scoring is an underwriting tool used to evaluate the creditworthiness of prospective borrowers. Credit scores are statistically derived measures of creditworthiness that seek to rank credit applicants according to their degree of credit or default risk. In essence, the score represents an odds ratio: how many applicants are likely to become delinquent or default at the corresponding score. Used for many years to underwrite certain forms of consumer credit, scoring has migrated in recent years to other forms of credit, such as mortgage and small business lending.

People with high credit scores may qualify for the cheapest credit on the best terms. Too many negative records and/or too few positive records can add up to a low score. Credit scores are widely used among credit card companies to determine the rates and terms of credit cards. Banks use credit scores to determine who can open checking accounts. Credit scoring is used by virtually all car insurance companies and the vast majority of homeowners insurance companies in determining the type and cost of insurance that will be made available to the applicant. It is even used in some situations to make decisions about whether to offer an individual a job, an apartment, or utility service. Credit scores are believed to be a determining factor in 90 percent of all consumer credit decisions. In short, a person's credit score has become fundamental to successes accessing credit and other financial resources.

Credit scoring and mortgage lending

The advent of credit scoring for mortgage lending occurred very quickly. Up until the mid-1990s, when a family wanted to obtain a home loan they typically went into a financial institution to apply for a mortgage. A loan officer would gather information about the potential borrower and the property for which the family was seeking financing and then make the final judgment about whether or not to make the loan. This process could last weeks.

Credit scoring is now used by most mortgage lenders as a key-underwriting tool to determine the credit worthiness of prospective borrowers. It is estimated that 60-70 percent of all home mortgage loan decisions involves the use of credit scoring in the approval process. In today's market, credit scores are used not just to determine whether an applicant qualifies for a mortgage, but also to determine the size of the loan, and increasingly, to set the interest rate and terms the borrower will be charged.

"FICO" is the most commonly used type of scoring in the mortgage market. It is devised by the California-based Fair, Isaac and Co., which provides the scoring analytics. The score is produced for lenders by running a consumer's raw credit-bureau data through proprietary statistical modeling software marketed by the company. FICO scores range from 300 on the low side to 800 on the high side. The score is not actually generated by

the lender (many lenders are unable to explain much to borrowers about how their score was derived). Instead the lender requests it as part of the credit report it obtains from one of the three national credit-reporting agencies (bureaus). Each bureau has proprietary components of their models that generate unique scores, and consequently, consumers can have more than one credit score.

Five areas of information are gathered from credit reports and used to calculate credit scores: previous payment history, amount of money owed, length of credit history, amount of new credit sought, and the mix of types of credit. The FICO model also allows users of their model to weigh each variable differently. Thus, some lenders may choose to customize the model they use. The credit bureaus emphasize that their scores are snapshots of a borrower's credit history at the time the score is generated. Scores are regularly updated and therefore, a consumer's score is, theoretically at least, always changing.

Another key development that changed mortgage lending is the rise of automated underwriting (AU). AU systems represent the fusion of statistical scoring scoring methods and high tech processing. Previously used in credit cards and auto lending, proprietary automated underwriting systems developed by Fannie Mae, Freddie Mac, the two government sponsored housing enterprises (GSES), along with several large mortgage insurers and mortgage lenders are now used for home loan purposes. The GSES' AU systems are also used by the U.S. Department of Housing and Urban Development (HUD) for FHA lending approvals, although the department is expected to unveil its own AU system at some point. Through the emergence of these systems and the scores they provide, a relatively small number of companies, some public chartered and some not, have a great deal of say in determining who qualifies for prime mortgage credit and who does not.

The AU systems can quickly evaluate mortgage applicants based on information in credit reports as one component of broader mortgage score. Mortgage scores quantify many aspects of risk associated with a particular application – including loan to value ratio, borrower characteristics, and loan type, in addition to credit history. A mortgage lender can submit a mortgage application to AU prior to approving the loan and receive a quick indication as to whether the secondary market will purchase the loan.

Officials at Fannie Mae and Freddie Mac believe that their systems vastly improve their ability to rank borrower risk and to determine eligibility standards for loan purchases. Both GSEs launched their systems in the mid-1990s and they quickly replaced the traditional manual approach to making loan decisions. Because they purchase such a high share of all mortgages underwritten, most mortgage lenders are influenced by the standards set by GSES' AU systems, even if they choose to hold these loans in portfolio. The GSES point to how the efficiencies achieved through AU has translated into increasingly higher acceptance rates as evidence that these systems are expanding opportunities for approval of more marginal, yet creditworthy, applications. Some observers believe that recent gains in homeownership rates for underserved segments of our population can be attributed, at least in part, to the underwriting standards that have

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