TheMReport — News and strategies for the evolving mortgage marketplace.
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Feature For institutions already struggling to juggle varying state requirements, a new set of federal rules may come as another headache. Credit Reporting and Credit Scores—Then and Now Change is on the horizon for credit scoring products. A look back helps shine a light on where they're going. By Greg Holmes, National Director of Sales and Marketing, Credit Plus C redit reporting has been around a long time. More than a century ago, small merchants worked together to share customer information— financial, employment, and character references—to help one another make informed decisions about extending credit. By the 1950s, information sharing had evolved, and small credit reporting agencies (CRAs) were being established. Generally, these were cooperative efforts among lenders and merchants in a specific geographic area and a specific industry—banking, retail, or financial. Lenders rarely got a complete picture of a customer's debt history because these credit reporting agencies did not share information across industries. Credit Scoring Is Born I n an effort to minimize bias and error, some lenders began to assign points to various elements of an applicant's credit report. While this helped standardize the lending decision-making process, it did not predict the consumer's future credit behavior. Enter Bill Fair, an engineer, and Earl Isaac, a mathematician. It was the 1950s and these two friends created a mathematical formula that became the first credit scoring model, one that could reasonably predict whether an applicant would repay a loan. Their model didn't consider race, religion, gender, or whether the applicant was a family member or friend—it simply relied on the performance history of other consumers to predict the behavior of applicants. The two men christened their company Fair Isaac Corporation and began developing personalized scoring systems for credit granting companies. In Hot Water B y the 1960s, CRAs found themselves in the middle of controversy. Consumers were being denied loans and opportunities based on information in their credit files, but they were not allowed to see what was in those files. The CRAs typically provided only negative financial history, as well as personal information gathered from newspapers and other sources about arrests, marriages, deaths, sexual orientation, job status, promotions, drinking habits, and even cleanliness. A congressional inquiry followed, and in 1971, Congress The M Report | 27