The controversy centers around the three-digit scores devised from the proprietary system of Fair, Isaac and Co. (FICO) that is estimated to help evaluate 75 percent of mortgage applications in the U.S.* The actual score is generated by one of the nation’s major credit-reporting agencies using the FICO model.

The FICO score came into being only in the past decade, as mortgage lenders and others clamored for higher-speed ways to evaluate potential customers’ often complex credit histories. In assessing credit risk, scores such as FICO supposedly account for a variety of factors based on thousands of other customers with comparable credit profiles.

Currently, FICO scores are not public domain, but instead can be presented to the customer by the lender -- if the lender chooses. The Truth in Lending Act doesn’t require lenders to share the scores with consumers, and the scores aren’t generated when a customer requests his or her credit report.

The FICO Storm
Many (including FICO and many mortgage lenders) argue that the score itself can be confusing to a consumer without an explanation by the lender. However, pundits claim FICO is simply attempting to guard its proprietary scoring system at the expense of consumers.

One critic of the current system is E-Loan, an online lender that also works to provide consumers with behind-the-scenes information on credit scoring. The firm fueled much of the recent score-access controversy earlier this year when it began offering FICO scores as a service provided by one of the company’s distributors. But E-Loan was forced to shut down the service in April, as FICO’s contract with the credit bureaus only allows release of the scores during a credit-making decision.

Who’s Being Served?
The FICO scale ranges from about 300 to 900, with most consumers ranking between the 600 - 750 range. In general, a high-risk customer scores below 620, while a lower-risk prospect ranks above 660.

Consumer advocates claim that many low-scoring loan applicants are less sophisticated borrowers, leaving this group vulnerable to predatory lending schemes. Still others say some consumers’ scores may be unfairly low -- even if they have never missed a loan payment -- thanks to factors including the number of credit cards owned and the number of credit checks that have been conducted. Score-access advocates back the position that, in these and any other cases which a score level is questioned, a consumer can at least be alert to the score before applying for a loan.

FICO stands by its position that consumers would be confused about the meaning of these scores without a professional explanation, and that the scores should therefore continue to be released only in the context of a loan decision. The company also notes that a credit score is only one factor a potential lender studies in making a loan, and therefore borrowers should not put too much emphasis on the score anyway.

Resolving the Issue
Reacting to consumer pressure for score disclosure, two of the country’s major credit-reporting agencies, Trans Union and Experian, have announced plans to introduce direct scoring access by year-end, reports Bankrate.com. But, instead of FICO scores -- which remain protected under FICO’s contracts with the credit bureaus -- each agency will instead offer scoring models similar to the FICO system. Critics counter that these systems are only money-making measures aimed at detracting consumer attention from the FICO issue. (The Trans Union score will be provided free with each credit report ordered at a price of $8, while Experian has not yet announced its pricing plans.)

With the credit-reporting agencies evidently shy of breaching contractual arrangements with FICO -- and FICO defending its current procedures -- the pressure is on legal channels to resolve the issue. Currently, a bill introduced in the US House of Representatives would amend the Fair Credit Reporting Act to require credit agencies to offer scores to consumers on demand. And, a proposal in the California legislature would mandate lenders to provide consumers with their score, the factors used to calculate the numbers, and how the scores affect the loan-approval process.

Meanwhile, assuring your potential customers that are concerned with the score-access issue means clearly disclosing and explaining the factors that compose a FICO score even before a loan decision is made. This means explaining that the elements that could lower the score include payments made 30 days past due, excessive numbers of credit accounts opened in the past year, short credit histories, revolving-credit balances consistently at or near maximum limits, and too many recent inquiries into a customer’s credit report (resulting from excessive numbers of new credit applications).

In explaining these factors, it is also helpful to know the FICO system as thoroughly as possible for a proprietary rating model. FICO offers a good overview of the system at www.fairisaac.com/. (Go to "Consumer Info," then to "Credit Scoring.")

While some of the information you provide may not satisfy all customers, it is the best you can offer in the current environment -- and the most customers can expect from you.

Notes
The Los Angeles Times (April 21, 2000).

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