Changes planned for FICO method
With sub-prime home loans going south at an alarming rate, is it time to revise a basic tool that lenders frequently use: the credit score.
Fair Isaac Corp., which developed the FICO formula that credit bureaus use to determine credit scores, is expected to announce today that it will revamp its formula.
The three-digit FICO score is widely used by lenders to gauge a borrower’s ability to repay debt. It also helps creditors determine the interest rate and repayment terms of a loan.
The company said the new calculation, which will debut in September, had nothing to do with the rising number of defaults in the sub-prime business, which makes high-cost loans to borrowers with weak credit.
Fair Isaac also said the revised formula would be more effective in determining the risk profile of people with thin credit histories, new mortgage seekers and those with past credit problems -- in other words, those most likely to be considered for sub-prime loans.
“We are always coming up with new versions,” said Ron Totaro, vice president of Global Scoring Solutions at Fair Isaac, which is headquartered in Minneapolis. “We started working on this before the current situation with sub-prime.”
The average loan seeker will detect little if any change in his or her credit score under the new formulation, he said. FICO scores still will range from 300 to 850.
Totaro would not say what factors in credit reports were being weighed more or less heavily in the new formula. He also denied that the revision was designed to fix weaknesses in scores for high-risk borrowers. “I would not say there were problems,” he said. “I would look upon this as part of our ongoing abilities to make the scores better.”
In the first three months of this year, foreclosures in California topped 11,000, up 800% from the same quarter of 2006, according to DataQuick Information Systems. Many of the loans that collapsed had been made to sub-prime borrowers. An additional 46,800 homeowners received default notices during that same time period.
Totaro laid the blame not on the scores but on how they were being used -- or ignored -- by some high-risk lenders. “I would ask them, ‘What kind of exotic mortgage products are you selling people with low FICO scores?’ ” he said.
Gerri Detweiler, author of “The Ultimate Credit Handbook,” said the scores and other important factors were often disregarded by high-risk lenders. “The goal was to make a loan, make a profit and sell it off to someone who takes the risk,” she said.
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