Credit Unions Won't Feel FICO Effect
Upcoming changes in the way FICO scores are calculated are designed to help more consumers qualify for better loan rates. However, the adjustments may not have much impact on credit union loan growth.
The new scores will give less weight to unpaid medical bills when assessing consumer creditworthiness. The San Jose, Calif., firm also said criteria will be revised so borrowers who have settled collection agency bills won’t be unfairly penalized.
FICO said the new criteria will be implemented some time this fall.
Ratings issued by FICO are used to determine credit scores for nearly 90% of the country’s consumer lending decisions.
Theoretically, the consumer impact of the changes could be huge given the number of people who struggle with medical bills. As of July, 64.3 million consumers showed some level of unpaid medical debt on their credit reports, according to credit bureau Experian. Of the 106.5 million consumers contacted by collection agencies, 9.4 million had no balance left on their accounts and would not be penalized under the new requirements.
However, credit unions may not see an influx of new loans, because medical bills and paid accounts have long been part and parcel of their internal underwriting policies.
“I do not have all of the technical details on how the FICO score algorithms will change, but I think, in the big picture, it doesn’t impact us that much,” said Bill Vogeney EVP and chief lending officer for $4 billion Ent Federal Credit Union in Colorado Springs, Colo. “When we manually underwrite a consumer loan one of the things we have worked hard at is making sure we overlook reasonable medical collection accounts.”
Ent FCU’s current loan portfolio of $2.5 billion is split almost equally between mortgage loans and all other consumer loans combined, Vogeney, chair of the CUNA Lending Council executive committee said. About 38% of the credit union’s loans are processed through automatic underwriting, meaning 62% receive manual processing, thus are considered in light of a reduced influence of medical bills.
“A consumer with a 620 FICO score with multiple collections is more likely to get some additional consideration from us,” Vogeney said. “I think that would impact about 5% to 10% of our members.”
Amy Perez, assistant vice president of retail lending for $2 billion Grow Financial Federal Credit Union in Tampa, Fla., also believed most credit unions take medical debt and member performance into account when making loan decisions. But whatever adjustments are made to a credit union’s loan evaluation system will not take place until the institutions reviews and changes its credit scoring model, she said.
“The decision to change to a new scoring model is extremely slow moving throughout our industry,” Perez said. “We validate our scoring models against our lending portfolio every other year; therefore, it will likely be some time before we consider a change.”
Grow Financial has a loan portfolio of $1.6 billion, about 60% of which is comprised of consumer loans, Perez said. The credit union generates $40 million to $50 million per month in consumer loans, many of which are made with internal underwriting standards that already mirror the new FICO guidance.
“At Grow, we weigh medical and paid collections less heavily in our overall decision,” Perez said. “If we were to move to this model immediately, it would likely be more predictive of the way we are underwriting today.”
The change in the FICO score calibration comes in the wake of a May 20 CFPB report that said consumer creditworthiness may be undervalued by as much as 10 points for borrowers who show medical debt on their credit scores. The current ratings system also undervalues a borrower’s creditworthiness after settling the medical debt, an oversight that can devalue consumer credit scores by up to 22 points.
The CFPB research report also found shortcomings in the FICO score calculation for consumers whose debt went to collection agencies. Both categories were addressed in the recent FICO score recalibrations.
“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” CFPB Director Richard Cordray said at the time of the report’s release. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”
Both Vogeney and Perez laud the new standards, but agree that they may be old news for many credit unions, and those that do make changes may take some time to implement them depending on which credit scoring model they’re using. Perez also cautioned that credit scores alone should not be the sole factor in determining member creditworthiness.
“If a change needs to be made to a scoring model to make it more predictive of actual borrower risk, then it should be made,” Perez said. “But our borrowers are more than their credit scores, which is why we have a team of highly trained underwriters who are able to see past the score to the bigger picture.”