Credit scoring has helped to produce a robust credit environment and increase access to homeownership for millions of consumers. This paper examines the role credit scores have played in helping lenders extend credit, and in particular mortgage loans, to underserved populations. It explores the relationship between available data sources and credit scoring, and examines the impact to consumers and lenders of expanding—or restricting—the amount and quality of data available to scoring and credit decisions.
Credit scoring enables lenders to extend credit quickly at the right price, while safely managing their risk. Lenders have been able to offer more credit to borrowers, at lower prices, and underserved populations have been a major beneficiary. Credit scoring depends on both negative and positive data on consumers and restrictions on the credit bureau data available to scoring would make it harder for people to get credit. To expand the benefits of scoring for consumers, the credit industry, legislators and scoring providers should pursue more consumer education about scoring and credit, a standardization of additional information available for scoring, and ongoing innovation in scorecard development.
Credit scoring grew out of the need to offer more credit, faster and without discrimination to an increasingly mobile population after World War II. It made lending processes faster, fairer, more accurate and more consistent. Loan decisions could be made in minutes versus days or weeks. The extension of credit could be based only on factors proven (not assumed) to relate to future repayment. Sophisticated scorecard models precisely weighted and balanced all risk factors – applying one consistent measure of risk to all applications regardless of the decision-maker. This made credit more accessible and affordable to millions of Americans. FICO® scores are accepted, reliable, and trusted to the point that even regulators use them to help ensure the safety and soundness of the financial system.(St. John, 2003).
The first commercial scorecard systems were developed by Bill Fair and Earl Isaac in 1958 for American Investment, a finance company based in St. Louis. Their initial projects successfully demonstrated the financial value of credit scoring. Scoring systems reduced delinquencies up to 20-30% while maintaining similar volumes; scoring systems could also be used to increase lending volume by 20-30% at the same level of delinquency.
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The Role of Credit Scoring in Increasing Homeownership for Underserved Populations
