FICO, the source of the FICO credit score, and Equifax, one of the big three credit reporting agencies, have teamed up to produce a tool to help credit unions and other financial institutions better predict their members' economic behavior.
The goal, a FICO executive explained, was not to replace or automate the loan underwriting process but to provide loan officers more information about members and what they might do in given economic circumstances and thus enable them to price the loan more correctly.
The tool, called the FICO Economic Impact Index, will be available with only the Equifax BEACON 09 credit scores and will use economic forecast data provided by Moody Investor Services to predict how a credit score should be calibrated to reflect different economic situations. Thus, an economic score of 700 might slide 27 points in the most dire circumstance in the broader economy, but only 13 points if the economic slide is followed by a sharp and speedy recovery.
"Lenders continue to evaluate the best means to manage their portfolios through difficult times" said Bobbie Britting, research director for consumer lending at TowerGroup, on the new service.
"Economic data has always been a consideration in the lending world, but today's informational needs are much more complicated. As consumer behavior changes and diverges, anticipating and understanding the underlying economic conditions has become much more important for lenders needing to maintain lending volumes on the front-end, as well as better serve their clients predelinquency or through the collections process," she added.
Careen Foster, FICO's director of global scoring services, agreed and noted that more data can only help lead to better lending and pricing decisions.
"We want to give credit unions and other lenders a better understanding of the impact of macroeconomic risks can have on their lending decisions," explained Foster. "This is not just another sort of credit score or another approach to credit scoring. We want to help lenders have a more 360-degree understanding of their loan risks."
Foster didn't know how many credit unions are currently using Equifax scores and would thus be able to use the program. She said the program would be priced to encourage users to get the full range of scenarios for each score so that loan officers would have the best access to the fullest information.
Foster also did not know when FICO might have a similar product for use with other credit reporting agencies. A few weeks ago the company rolled out a tool the called the FICO Economic Impact Service to offer a similar service that can be used with every credit score.
The new scores will enable CUs to lend in a more realistic way, according to Foster.
For example, in an average economic year, so far at least, a person with a credit score of 700 will, on average, behave like a consumer with a 700 credit score. But in a stressed economy with a high unemployment rate, a consumer with a 700 credit score might act more like a consumer with a 690 score. In a very strong economy, the same consumer might act like a consumer with a 710 score.
CUs could use the data to help price individual loans as well as to make policies that could impact all of a given type of loan applications. For example, if the analysis suggests that a strong economic recovery is underway, a credit union might feel comfortable lowering the minimum score needed for a credit line increase or an auto loan. Likewise, if the numbers suggest an approaching economic downturn, the minimum score required for a given mortgage interest rate might be raised, Foster explained.
"High unemployment rates and rising account delinquencies underscore the need for greater transparency into consumers' financial profiles," said Dann Adams, president, Consumer Information Solutions, Equifax. "With FICO Economic Impact Index, lenders gain a more complete view of consumer financial health to make sound lending and account management decisions. For today's lenders, having a 360 degree view is critical to navigate consumer economic risk imposed by market forces that may be beyond their control."