January 27, 2020
Orion’s brokers know that any loan approval involves an analysis of the five Cs of credit: capacity, capital, conditions, character, and collateral. Last week “capacity” was in the news, namely how a new scoring model may change your client’s FICO score starting this summer. The folks at Fair Isaac Corp., the company behind FICO scores, have been hard at work. Should you care? Perhaps, and certainly your clients may.
FICO Score 10 is being rolled out this summer and takes into account a consumer’s account balances and missed payments over the last two years. Analysts guess that about 40 million U.S. consumers will see their score drop but another 70 million may see them rise as a result of the bigger gap between consumers deemed to be good and bad credit risks. Consumers who are already “good” credit risks (680 or above) may see their scores increase, those with current scores at 600 or below will probably see them drop.
Orion’s brokers know credit inside and out. A consumer’s utilization of credit limits matter: Consumers who consistently use all of their credit limit(s) will suffer a downgrade in score. And the new approach will weigh delinquencies, especially those in the last two years, more heavily than past models, putting borrowers with late payments on their records at a disadvantage. And warn clients about personal loans: Fair Isaac has said it plans to flag borrowers who apply for them, as they are generally considered riskier than other financial products.
The new model now incorporates consumers’ debt levels, considering account balances for the previous 24-plus months, while prior FICO scores have focused on more recent account balances. Consumers who fall or have fallen behind on paying their debts, as well as those with high credit utilization ratios in the past two years, will likely see a decrease in their score.
But Orion’s brokers have plenty of borrowers with already good credit, and the new model will likely provide a boost and help increase loan program options, lower fees, and rates that the higher credit score would get them. And lenders/servicers should see lower default rates, a fine thing for prices in the secondary markets. Mortgage lenders and servicers take note: “The reduction in defaults is even higher for newly originated mortgage loans, at 17% compared to the version of the FICO Score used in that industry,” Fair Isaac reports.
Orion’s brokers should tell their clients that the new FICO 10 may be used in the mortgage process later, but not now. Fannie and Freddie must review it, and correspondent investors like Wells Fargo or AmeriHome, and sizeable wholesalers like Orion, won’t use it until then.