Its long but well worth the read, it's very informative.
Equifax, Experian and Transunion have begun limited marketing of a new consumer credit scoring algorithm to Risk Based Lenders. According to David Rubinger of Equifax, the planned nationwide rollout to Risk Based Lenders is scheduled for July, and will be followed, approximately 9 months later, with the public disclosure of these scores to customers.
An algorithm is a mathematical formula that is written to assign value to specific data in order to attain a final score. Risk Based Lenders are financial institutions that lend cash based upon a consumer's credit history and the consumer's ability and historical willingness to repay a loan. These types of lenders cover the full range of financial institutions lending cash for credit cards, auto loans, unsecured loans and mortgage loans.
David Rubinger, the national marketing contact for Equifax, explained "approximately 1 year ago, the analytical managers for the three credit bureaus got together for the purposes of addressing variations inside the present scoring models in use. Under the current system, the 3 main credit-reporting agencies use 3 different algorithms that create 3 different and unique scores, regardless of the data being scored. The primary issue to be addressed was how they could create a answer for Risk Based Lenders who wanted fewer variations inside the credit scoring models they were using to make lending decisions."
The answer for the 3 agencies was to create a single algorithm that would create a more "predictive score" by making a single variable in scoring, which would be the data. To do this, they came up with a answer that involved making an independent business known as VantageScore, LLC. Each credit-reporting agency would own an equal share in the business, and purchase a license to use and sell the resulting scores to risk based lenders under the VantageScore service mark. The hard component was making the uniform scoring that the 3 credit-reporting agencies were attempting to style and sell.
To accomplish as close a model as possible, the 3 credit agencies tested the initial base algorithm on 15 million active credit files. Throughout the testing procedure, changes were made to the algorithm as were needed to create a more stable scoring model until the finished product created an acceptable level of score variance in the finished product.
By making an independent LLC business, the 3 credit reporting agencies are now able to provide a single product that has only 1 variable, the data being scored. Where the credit info reported is the exact same, the score for a consumer file will be the exact same, regardless of whether or not the score comes from Transunion, Experian, or Equifax. Where the credit info is different, the variations in the actual score will be substantially reduced.
Under the new VantageScore product, the 3 agencies decided to change the scoring formula from its current 450 to 850 scoring range to a new 501 to 990 range. When asked about why they would do this, Rubinger responded, "The new scoring model is to help customers better comprehend their credit score. By basing it on a grading scale utilized throughout the K through 12 school system, customers can look at their score and know precisely what they have". Sadly for Risk Based Lenders, the new scoring model will need they spend thousands of dollars in updating software to incorporate the new scoring model.
When asked about some of the negative aspects of the change, Mr. Rubinger declined to answer any questions.
The initial question that Down Payment Solutions has relates to anti-trust laws and where the congressional oversight is. As we only have 3 main Credit Reporting Agencies, how is it they can bypass any oversight to create an LLC business in order to provide a single uniform product in which all can sell, with the objective appearing to be the total replacement of the present day independent scoring algorithms?
When contacted for comment on this matter, the Department of Justice - Anti-Trust division - declined comment and suggested customers who have concerns ought to e-mail them at antitrust.complaints@usdoj.gov. Neither Senator Bill Nelson (D - FL), Senator Mel Martinez (R - FL), Congressman Jim Davis (D-FL) or Congressman Michael Bilirakis (R- FL) offices would provide any comments for this article.
Jan Helder of the Helder Law Firm known as the formation of a LLC by the 3 Credit Reporting Agencies "shady, at best" and advised that, unfortunately for customers, they "cannot file an anti-trust suit until they have experienced a financial loss resulting from the new VantageScore credit scoring system, and then they will have to prove financial loss in court." This will be well following low to moderate-income families, and the businesses dependent upon them, have felt the tightening of credit nationwide.
"The new VantageScore model creates a significant financial risk to customers in their ability to obtain inexpensive financing," according to Dwayne Singletary of Allstate Mortgage and Loan Corp in Tampa, Florida. "Many risk-based lenders in the mortgage business use all 3 credit-reporting scores--also recognized as a Tri-Merged Credit Report--and have programs that allow them to use the credit-reporting agency that has the highest credit score. A reduction in that greater score will most likely result in home buyers needing more cash out of pocket for a down payment, or need them to pay a greater rate of interest…" under the VantageScore model, whether or not refinancing or purchasing.
In the installment and revolving credit marketplace, most risk-based lenders do not use the scores from all 3 reporting agencies. Rather, every lender selects the reporting agency that best fits their kind of borrower. A reduction in any 1 score across any credit-reporting agency, via adoption of the VantageScore algorithm, could result in customers being unable to obtain credit, or customers paying a substantially greater rate of interest to borrow the exact same cash tomorrow, versus what they would pay under the current separate credit-scoring models.
Rubinger contends the new scoring model is created to help customers better comprehend their score. However, given the thousands of dollars in financial expenses that will be incurred by Risk Based Lenders in updating programming, it leaves the impression the new scoring model might really be created to mislead customers into believing the new VantageScore system really improves their credit scores.
Under the current system, in theory, if a consumer has a Transunion credit score of 600, then potentially under the new VantageScore model, they could have a score as high as 720. This certainly would go a long way towards silencing a potential consumer backlash if somebody with challenged credit sees a dramatic increase in their credit score. This is potentially misleading, and might be the reason for the delay in customers having access to their new VantageScore credit score for any given credit-reporting agency.
At present, it has not been disclosed how customers will know what model they are being scored under. As customers apply for credit, most will assume they are being scored under existing Credit Models, when in reality they might have been scored under the VantageScore system if a specific financial institution adopted it.
Consumers who are concerned about the potential implications that VantageScore has on their financial future ought to contact the DOJ - Anti-Trust Division. In addition, we strongly encourage you to contact your Congressman via www.congress.org.
Down Payment Solutions believes that before this new Credit Scoring System is implemented, both the DOJ and Congress have some over sight as to how, when and if Transunion, Experian and Equifax, can implement this kind of product in order to protect each and every American consumer and the businesses dependent upon them.
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Author: George Chaney, President, Down Payment Solutions, Inc. http://www.downpaymentsolutions.com
