MReport June 2017

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26 | TH E M R EP O RT FEATURE Y ou may have seen recent news articles about the consumer reporting agencies— Equifax, Experian, and TransUnion—removing certain derogatory public record information from their credit files, and you may be wonder- ing, what type of information is being removed. And how will it potentially impact FICO® Scores? Is there likely an impact to my consumer applicant pool? To provide a bit of background, the information that is being re - moved by the consumer reporting agencies (CRAs) is information on tax liens and civil judgments harvested from public records. The information will be removed, if the public records have insuffi - cient personally identifiable infor- mation to verify the accuracy of the public record information, or should they not meet the 90-day minimum frequency for updates. In July 2017, the three CRAs are scheduled to make these changes to the criteria they will require to accept the reporting of a tax lien and/or civil judgment. This action is part of the National Consumer Assistance Plan (NCAP), a com - prehensive series of initiatives in- tended to evaluate the accuracy of credit reports, the process of deal- ing with credit information, and consumer transparency. As part of NCAP, the CRAs are changing the data standards and service level requirements of the public record data they maintained. According to the CRAs, it is very likely that civil judgment pub - lic records (debts owed as a result of a civil lawsuit and judgment) will not be part of the CRAs' core consumer credit database after the NCAP's effective date. Changes are also anticipated to tax lien public record data, most commonly as - sociated with a failure to pay taxes. According to the CRAs, as much as 50 percent of this data may not meet the enhanced verification standards and will be removed from the CRAs' core consumer credit database. The three CRAs do not expect any change to bank - ruptcy public record data. To proactively answer the industry's questions regarding the potential impact of this action taken on the CRAs database to FICO Scores, FICO undertook a detailed assessment for all FICO Scores in market to determine the impact to risk prediction, scorable rate, and score distribution. Key Findings: • Approximately 6 to 7 percent of the population with a FICO Score had a judgment or tax lien purged from their credit re - port as a result of the enhanced public record standards. • FICO identified minimal im- pact to risk prediction and the odds-to-score relationship on the total consumer population. • There was no impact on the FICO scorable rate since the presence of a public record does not factor into the FICO Score minimum scoring criteria. As a reminder, the FICO Score minimum scoring criteria re - quire at least one tradeline open for six months and at least one tradeline updated within the last six months. FICO does not score consumer files that only contain a public record or collection. • FICO observed no material impact to score distributions on the total population. This is not surprising as the impacted population segment is generally low scoring—below most lend - ers score cut-off—having a me- dian FICO Score of 565 (prior to any data being purged). • A key reason the impacted population did not tend to experience a significant increase in their FICO Scores pertains to the other information remaining in their credit report. Ninety-two percent of impacted individuals had other negative information on their credit report, such as major delinquencies, charged-off accounts, bankruptcy, etc. Digging into the Data F or its analysis, FICO analyzed a nationally rep- resentative random sample of approximately 10 million credit files (including roughly 500,000 impacted credit files) from each CRA. Matched datasets were used: an observation snapshot from mid-2014, and a perfor- mance snapshot from mid-2016. This analysis was based on each CRA's representation of the judgments and tax liens that would be removed after the NCAP-related public record standards are implemented in July 2017. FICO conducted impact analyses across the three CRAs on the most widely used FICO Score versions (across base FICO Score versions and industry-specific FICO Score versions). Results observed were similar in each instance. In the interest of producing a stream - lined article, the results pre- sented here will primarily focus on the impact to FICO Score 9 at one of the CRAs (CRA1), as very similar results were seen across each FICO Score version. Nearly Identical Scores F ICO research identified minimal impact to risk predic- tion resulting from the CRAs' enhanced public record standards as part of NCAP. This analysis was conducted across industries, across the credit lifecycle, and for various FICO Score versions. Fig- ure 1 below shows the difference in the Kolmogorov–Smirnov (K-S) Knowing the Score The National Consumer Assistance Plan is requiring consumer reporting agencies to remove certain public record information from consumer credit data, and knowing what impact this will have is key. By Joanne Gaskin

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