New Rating Gauges Risk to Borrowers on Bad Credit Home Loans

According to Fair Isaac Credit Services Inc., a recent study of its FICO Expansion scores - which are used to qualify borrowers who have little or no information on file with credit bureaus - demonstrates they are a reliable tool for predicting risk.

Fair Isaac created the FICO Expansion score in 2004, to augment what is now known as the “Classic FICO” score. The FICO Expansion score is intended to help lenders gauge the risk of about 20 percent of the population with thin or no credit bureau files, those needing to apply for bad credit home loans.

This demographic includes recent immigrants and young adults who make up a significant proportion of the first-time home-buyer market.

Fair Isaac says its study of the performance of FICO Expansion scores - conducted with the cooperation of more than a dozen of the largest mortgage lenders in the business - proves they are a reliable measure of risk that calibrate well with the Classic FICO.

In the study, FICO Expansion scores consistently assigned lower scores to borrowers who later had more delinquencies and charge-offs, and higher scores to consumers who ended up with fewer delinquencies and charge-offs, the company said.

There was a close correlation between the Classic FICO and FICO Expansion scores in their ability to predict the odds of a borrower becoming delinquent. Both assign scores of 300 to 850, with a score of 300 representing the highest-risk borrower and 850 the lowest.

“This whole set of data we worked through reinforced that the risk associated with a score of, say, 650 on the FICO Expansion equates well to a Classic FICO 650,” said Fair Isaac Vice President Lisa Nelson, who oversees the FICO Expansion program. “That’s a key component when you are out talking to the mortgage industry.”

Mortgage lenders participating in the study included HSBC, First Franklin and Option One. Although those companies are focused on the subprime - or bad credit mortgage - market, Nelson said FICO Expansion scores are commonly used to qualify borrowers for prime and Alt-A loans.

“The rationale is … to assess the risk of consumers, so you don’t have to push them into subprime” loans, Nelson said.

Fair Isaac is not alone in providing tools for lenders who would like to do business with the estimated 50 million adult Americans with thin or no credit bureau files.

First American Corp. says more than 200 mortgage brokers are using its Anthem suite of credit reporting applications to help home buyers with limited credit histories qualify for prime-grade mortgage loans. Anthem uses rent, utilities, insurance and other payment histories to augment credit bureau data.

Nelson said FICO Expansion scores differ from Anthem in that:

“We’re not building a credit report as a consumer applies for a loan. We’re taking that applicant from the lender when they are not scorable, and pinging out to data providers” to create a score.

When Fair Isaac gets a query from a lender, it polls a network of data aggregators, who return information on an applicant’s past payment performance in real time. Nelson would not disclose the identity of the data providers, but said all comply with the Fair Credit Reporting Act.

The companies collect payment history that includes past checking accounts, phone and utility bills, magazine subscriptions, and rent-to-own plans.

How many accounts people open, how long they have them, and whether they are delinquent on payments are all tools Fair Isaac uses to generate a report with a credit score and its justification for that score.

“We pull in both the positive and negative, so it’s not a consumer choosing to provide us with information,” Nelson said.

In the study, Fair Isaac was able to score 50 percent to 70 percent of mortgage loan applicants with no credit bureau files, and 65 to 85 percent of mortgage loan applicants with “thin” files.