Internet
credit scores mislead if they are not FICO
KENNETH
HARNEY: Internet credit scores mislead if they're not FICO
May 21, 2006
WASHINGTON -- Is
it a FICO score or a Fake-O?
Mortgage brokers
and lenders say it happens all the time: A mortgage applicant says,
"Oh, I've already checked my credit score online." Then the
loan officer pulls the home buyer's FICO score and finds that it's 50
or 100 points lower than the generic credit score the applicant
quoted.
"This is
becoming a real problem -- a lot of people simply don't know the
difference between FICO scores and other scores," says Ginny
Ferguson, immediate past chairwoman of the National Association of
Mortgage Brokers' credit-scoring committee and co-owner of Heritage
Valley Mortgage Inc. of Pleasanton, Calif. "They think it's all
the same."
FICO scores,
developed by Fair Isaac Corp., are the predominant credit measure used
by the mortgage industry. The scores run from 300 to 850 and are used
to predict a borrower's likelihood of future nonpayment, with higher
scores indicative of better creditworthiness.
Other commercial
scoring models, which may also accurately predict risk of nonpayment
and gauge a consumer's credit health and behavior, are widely
available on the Internet.
But they are
rarely used by mortgage lenders and therefore have limited relevance
for a home mortgage application. Lenders use FICO scores to price
mortgages.
Lower FICO scores
can cost applicants hundreds of dollars a month in higher interest
payments and thousands of dollars over the term of the loan.
When FICO scores
are substantially lower than non-FICO scores, "the consumer
assumes the broker did something to make their scores worse" --
perhaps seeking to charge them higher rates or fees, said Ferguson.
"And, of course, that is not the case."
Independent credit
reporting agencies that supply FICO scores to mortgage lenders also
are feeling the heat.
"Our members
get blamed by their own customers, who are primarily brokers and
lenders," says Terry Clemans, executive director of the National
Credit Reporting Association, a trade group that represents hundreds
of credit agencies providing consumer reports and scores to mortgage
lenders.
"We're
getting a lot of angry conversations about 'why is your score lower'
than what the consumer got somewhere else" online, Clemans said.
But credit
reporting agencies are simply middlemen -- purchasing reports and FICO
scores from the three national credit bureaus, Equifax, Experian and
TransUnion -- and repackaging them for mortgage lenders.
Ferguson, who
lectures nationwide to loan officers on credit scoring, says she's
only seen one instance when a mortgage applicant's FICO score was
higher than an Internet pop-up site's score, "and that was just
by two points."
Typically, she
says, a FICO score comes in anywhere from 35 to 100 points below a
generic score purchased from an Internet site -- and that's where the
trouble starts because "we just don't use those other
scores."
Fair Isaac itself
has become concerned about marketplace confusion over its proprietary
scores and a multitude of other scores. Tom Quinn, vice president of
global scoring for Fair Isaac, says the company's own research has
documented disparities of anywhere from 5 to more than 200 points
between FICO scores and non-FICO scores on the same consumer.
The disparities
exist because the statistical scoring models often assign different
weights to the same information and generate what may be different
numerical conclusions.
Some of the most
active Internet-driven score purveyors are associated with national
credit bureaus. But they don't go out of the way to tell consumers
that the credit score they are buying is an in-house generic score,
not a FICO, and therefore it will have little relevance in a home
mortgage transaction.
For example,
TrueCredit.com is owned by TransUnion. The Web site trumpets the
importance of credit scores as financial management tools, but only
reveals in tiny block print at the end of its "credit score
sample report" page that "the credit score provided here is
not a so-called FICO score."
Steven Katz, a
spokesman for TransUnion, said his company's TrueCredit score "is
really intended to help consumers understand the importance of taking
control" of their own credit management.
It is, in other
words, primarily an educational tool, not what will actually be used
to qualify you or price your mortgage.
Nonetheless,
prominent on the TrueCredit.com site is the statement that the
TransUnion score is "how you may be viewed from a lender's
perspective." Except, of course, if that lender happens to be
taking your application for a mortgage and only pulling your FICOs.
KENNETH HARNEY,
based in Washington, writes on national housing issues.
Copyright © 2006
Detroit Free Press Inc.
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