In a May 2014 report, the Consumer Finance and Protection Bureau (CFPB), criticized credit-scoring models, led by FICO, used by the financial industry, saying they put too much emphasis on unpaid medical debt and lead to an overly negative view of consumers. The report states if consumers are unaware of the medical debt, or view these debts as illegitimate, then they are being unfairly penalized through the credit scoring system. If medical debt is removed from consumer credit reports what happens to the creditworthiness of consumers and the security of lenders?

FICO was founded in 1956 as Fair, Isaac and Company by engineer Bill Fair and mathematician Earl Isaac. It began selling its first credit scoring system two years later.  FICO is presently located in San Jose, CA.

The present FICO score was first introduced in 1989. The FICO model is used by the vast majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion.

There are three specific changes being instituted into the new FICO - 9 credit scoring process.  They are:

• Debts that go to collections agencies and get repaid won’t count against a consumer’s FICO score.
• Medical debts will have a smaller effect on the score. If your only major bad mark comes from unpaid medical debts, FICO says it expects your credit score to go up by 25 points. (Scores range from 300 to 850.)
• A technique to analyze people’s creditworthiness if they don’t have much of a credit history.

The CFPB is an independent unit inside the US Federal Reserve.

In May 2014 the Consumer Finance Protection Bureau (CFPB) issued a report that found consumers’ credit scores may be overly penalized for medical debt that goes into collections and shows up on their credit report. Credit scoring models (like FICO) may underestimate the creditworthiness of consumers who owe medical debt in collections. The scoring models also may not be crediting consumers who repay medical debt that has gone to collections.

The CFPB contends many consumers are unaware of the unpaid medical debt or believe the debt is illegitimate and are therefore receiving unjustified lower credit scores. Lower scores pushes otherwise credit worthy consumers out of mortgages and home ownership.

There is also claims of inserting politics into credit scores.

In 2012, CFPB reported it would begin policing the credit reporting industry due to consumer claims that the credit reporting industry was wracked with errors and racial bias. This despite a major 2011 study by the Policy and Economic Research Council found that 98% of reports contain no material errors. And a 2007 Federal Reserve study that found no racial bias in credit scoring in a national sample of more than 300,000 credit bureau records.

In August 2014, The National Association of Realtors applauded FICO’s new scoring process as a way to differentiate between medical and non-medical collection agency accounts.

“This move will ultimately make a real difference in the lives of millions of Americans, who have been shut out of the housing market or forced to pay higher mortgage interest rates because of flawed credit scores. Since the housing crash, overly restrictive lending has been the greatest obstacle to homeownership,” NAR President Steve Brown said.  "Flawed"?  "Overly restrictive"?

Which is more important, NAR's need to sell homes or a lender's need to be profitable?

This is not the first claim of overreach against the CFPB. Critics of CFPB pressure on the credit reporting industry cite many potential problems.  FICO scores are the required credit risk underwriting standard for all FHA-insured loans as well as all mortgages sold to Fannie Mae and Freddie Mac. Didn't loosening credit and lending standards cause these institutions to go belly-up during the bubble?

Another is, if "unexpected" medical expenses can be marginalized, why not "unexpected" loss of wages or transportation or change in family or marital status?

Conclusion

These new standards are expected to raise an applicants credit score by up to 25 points. In itself this should not distort the creditworthiness of the consumer or stability of the lender.

Yet, let us not forget, there remain 5.7 million "homeowners" in foreclosure. Many of these homeowners fell victim due to government loosening of lending standards - can you say no-doc loans? Home ownership is not a right - it is a reward for disciplined financial planning.  Loosening lending standards allows for more money to be lent which causes house prices to rise which causes standards to be loosened which causes house prices to rise which causes ...

KA-BOOM!

If you have any comments or questions, please contact me here.

Good luck!

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