Tech­nol­ogy

A new credit score that in­cludes con­sumers’ cash flow along­side their credit score is win­ning praise for its po­ten­tial to help ex­pand ac­cess to credit, but some worry it gives the credit bu­reaus even more data that could be com­pro­mised.

National Mortgage News - - Contents - By Penny Cros­man

New Ul­traFICO score stokes con­cerns about data pri­vacy

A new credit score that in­cludes a con­sumer’s cash flow along­side their credit score — dubbed Ul­traFICO — is win­ning praise for its po­ten­tial to help ex­pand ac­cess to credit but also stok­ing con­cerns about its data pri­vacy im­pli­ca­tions.

FICO an­nounced in late Oc­to­ber that it is test­ing a new credit score with Ex­pe­rian and data ag­gre­ga­tor Finic­ity that draws on sev­eral months’ worth of data from con­sumers’ bank ac­counts. The idea, ac­cord­ing to FICO, is to cre­ate a “sec­ond chance” score that could al­low con­sumers who’ve been de­nied credit due to the tra­di­tional model an­other shot at ob­tain­ing it. But some ob­servers saw an imme- di­ate po­ten­tial prob­lem — namely with credit bu­reaus get­ting un­fet­tered ac­cess to bank ac­count data.

“If the credit bu­reaus want to start rou­tinely ac­cess­ing our bank ac­counts, they should be sub­ject to bank-like reg­u­la­tion,” said Sheila Bair, a for­mer chair­man of the Fed­eral De­posit In­sur­ance Corp. “I’ve been a critic of big U. S. banks in cer­tain ar­eas, but I do be­lieve their in­for­ma­tion se­cu­rity sys­tems are sub­stan­tially su­pe­rior to the credit bu­reaus and that is due, in large part, to their reg­u­lated sta­tus.”

Bair sees a po­ten­tial up­side in that it could help ex­pand credit ac­cess, but won­ders if it’s worth the risk.

“The pri­vacy and in­for­ma­tion se­cu­rity is­sues could eas­ily out­weigh those ben­e­fits.”

Bair isn’t alone. Gary Reeder, vice pres­i­dent of in­no­va­tion and pol­icy at the CFSI, is con­cerned about risk on a sys­temic level around com­pa­nies like credit bu­reaus that the en­tire fi­nan­cial ser­vices in­dus­try de­pends on so heav­ily.

“We’re get­ting to where we have larger sets of data housed in in­sti­tu­tions that the en­tire fi­nan­cial ser­vices in­dus­try rests on, and they don’t have the same reg­u­la­tion and se­cu­rity pro­to­cols a reg­u­lated bank would have,” he said.

Though credit bu­reaus are over­seen by the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau, the reg­u­la­tor fo­cuses on con­sumer pro­tec­tion. It doesn’t im­pose cap­i­tal re­quire­ments to pre­pare for a pos­si­ble data breach or fail­ure.

“As you con­cen­trate data and more peo­ple use that data to make de­ci­sions, there’s a liq­uid­ity and cap­i­tal ques­tion that comes to the fore be­cause peo­ple can say they have li­a­bil­ity, but with­out cap­i­tal that’s mean­ing­less,” Reeder said. “I can say you’re li­able, but if your pock­ets are empty, there’s no­body to pay for that li­a­bil­ity. The banks know that at the end of the day they are the only ones that have deep pock­ets, they’re re­quired by law to have them.”

But Mike Pecan, head of data strat­egy at Ex­pe­rian, ar­gues that the firms in­volved take se­cu­rity and data pri­vacy se­ri­ously. He notes that the model is opt-in — con­sumers have to give per­mis­sion for Ex­pe­rian to col­lect their bank ac­count data. As a re­sult, the credit bu­reau is un­likely to be­come an al­lur­ing honey pot of con­sumer bank ac­count in­for­ma­tion.

Steve Smith, CEO of Finic­ity, said that his com­pany has gone through ex­ten­sive in­for­ma­tion se­cu­rity re­views to ob­tain data-shar­ing agree­ments with banks. It has also ob­tained third-party in­for­ma­tion se­cu­rity cer­ti­fi­ca­tions for fi­nan­cial data, in­clud­ing PCI and SOC2. The com­pany also uses the to­k­enized au­then­ti­ca­tion meth­ods in the FDX’s Durable Data API stan­dard.

Reeder says he’s not op­posed to the new score, but says there needs to be bet­ter safe­guards.

“With the right con­trols and the right clar­ity for con­sumers about what they’re giv­ing up, it could help peo­ple who are start­ing out their credit lives, par­tic­u­larly as they come to the U. S.,” he said. “There are large num­bers of peo­ple who come who have good credit his­to­ries, but they can’t trans­port their score; their bank ac­count data would prob­a­bly be suf­fi­cient to tell you their cred­it­wor­thi­ness.”

How the new score works

When a con­sumer ap­plies for credit at a lender that sup­ports the new score, they will be given the chance to opt in to the use of Ul­traFICO. The con­sumer will also be al­lowed to de­cide which of their ac­counts should be con­sid­ered in the score.

Finic­ity, which has data-shar­ing agree­ments with sev­eral large banks but works with all 15,000 fi­nan­cial in­sti­tu­tions, will then be given the go-ahead to draw sev­eral months’ worth of data from those ac­counts in what­ever man­ner it nor­mally would — through an API, screen scrap­ing, or some other method.

Finic­ity will pro­vide that cash flow data to credit bu­reau Ex­pe­rian, which will mix it in with its usual credit re­port data and pour it into the Ul­traFICO score model.

Banks will be able to slip the new score into their un­der­writ­ing en­gines the same way they use other FICO scores like FICO 8 or 9.

Ac­cord­ing to FICO, some lenders plan to use Ul­traFICO as a “sec­ond chance” score.

“As op­posed to a con­sumer be­ing de­clined for the credit or terms they’re seek­ing, a lender has an op­por­tu­nity to reach out to the con­sumer and say hey, if you’re will­ing to share ad­di­tional in­for­ma­tion with me, I may be able to give you the credit you’re look­ing for,” said David Shel­len­berger, se­nior direc­tor of scor­ing and pre­dic­tive an­a­lyt­ics at FICO. “By lev­er­ag­ing check­ing, sav­ings and money mar­ket ac­counts, in­for­ma­tion not found in a tra­di­tional credit file, we can show pos­i­tive fi­nan­cial man­age­ment ex­pe­ri­ence and that cor­re­lates nicely with pos­i­tive credit risk.”

The goal for Ul­traFICO is to pro­mote fi­nan­cial in­clu­sion, let­ting peo­ple who haven’t built up much in their credit re­port yet and peo­ple who have had tem­po­rary fi­nan­cial set­backs due to loss of a job or ill health, qual­ify for credit.

On­line lenders have been con­sid­er­ing bank ac­count data in their un­der­writ­ing de­ci­sions for years and have found it to be pre­dic­tive of cred­it­wor­thi­ness.

Ac­cord­ing to FICO, a hand­ful of banks and credit unions are pi­lot­ing the new score and many fintech lenders, banks and credit unions have ex­pressed in­ter­est in it. The pi­lot should go live in the first quar­ter of 2019 and the score should be gen­er­ally avail­able to lenders in sum­mer 2019.

Who will ben­e­fit?

Ac­cord­ing to FICO, con­sumers who haven’t had a neg­a­tive bal­ance in a check­ing ac­count for the past three months and have main­tained a bal­ance of $400 or more should see their credit score in­crease with Ul­traFICO.

“The great­est in­crease we see is for is for those con­sumers that are prob­a­bly hav­ing the hard­est time try­ing to es­tab­lish credit,” Shel­len­berger said. “Those would be con­sumers with young or thin credit files and con­sumers who may have ex­pe­ri­enced pre­vi­ous fi­nan­cial dis­tress.”

In FICO’s tests, 80% of con­sumers who have thin and young credit files but can main­tain an av­er­age bal­ance of $ 400 or more in their bank ac­counts see at least a 20% in­crease in their score.

“That can be sig­nif­i­cant for con­sumers that are try­ing to ob­tain credit at rea­son­able terms,” Shel­len­berger said.

Among con­sumers that have had fi­nan­cial dis­tress, ev­i­denced by a charged-off ac­count or a col­lec­tion ac­count on file, one in ten see an in­crease of 20 points or more in the new score, the FICO tests found.

“There are 53 mil­lion un­scorable con­sumers to­day — they can­not be scored by FICO 8 or 9,” said Pecan with Ex­pe­rian. “With in­clu­sion of this con­sumer-per­mis­sioned data, we be­lieve we could reach up to 90% of those peo­ple.”

Pecan also said that older peo­ple who have paid off their mort­gage, car loans and other debt and want to get a re­tire­ment RV of­ten strug­gle to get credit.

“They man­age their fi­nances, but they haven’t used credit in a long time and can’t get a loan,” Pecan said. “This opens op­por­tu­ni­ties for them.”

But younger peo­ple, who haven’t had time to build up a strong credit file, may ben­e­fit most from the new score.

“This ap­pears to be a shift to ad­dress how younger peo­ple use money,” said credit ex­pert John Ulzheimer, who formerly worked at FICO and Equifax. Mil­len­ni­als and Gen Zers are less likely to use credit cards and loans than their par­ents were but do have bank ac­counts. Ulzheimer also ar­gued that only a nar­row slice of con­sumers will ben­e­fit from the new score.

“This won’t turn some­one with a tra­di­tional FICO score of 500 into an A+ credit prime,” he said. “This will push some­one who is along the mar­gins risk-wise over the fin­ish line.” Such a per­son might be sub­ject to high rates, he noted.

Will banks con­sider it?

One ad­van­tage banks may have from Ul­traFICO is a step to­ward bet­ter com­pet­ing with on­line lenders.

“This seems to be a way to help slow-mov­ing, di­nosauric lenders be more nim­ble and com­pete with these cut­ting-edge on­line lenders that didn’t grow up mar­ried to FICO and there­fore don’t have this de­pen­dence on FICO when they build their risk man­age­ment plat­form,” Ulzheimer said.

Ul­traFICO lets banks mod­ern­ize their un­der­writ­ing de­ci­sions with­out hav­ing to make ma­jor changes to their loan sys­tems.

Smith said that the world is chang­ing and banks need to change with it.

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