By Harold Copher, Jr. • Willow Bend Mortgage

I often find myself answering questions regarding credit scores. Much like today’s political discussions, I don’t always enjoy them, and I am sometimes at a loss justifying the correlation between history and score.

I think most of us know that credit scores were developed and are used to provide a way to measure a potential borrower’s creditworthiness. The Fair-Isaac Company, founded in the mid-1950’s, introduced the first FICO credit bureau risk score in 1981. Exponential growth began in 1995 when Freddie Mac and Fannie Mae recommended the use of the FICO credit score model in analyzing risk for residential mortgage loans.  

In the late 1990’s, both Freddie Mac and Fannie Mae began relying on algorithm based, automated underwriting systems to approve or deny loan submissions. You may recognize their names — Fannie Mae’s DU or Desktop Underwriting and Freddie Mac’s LP or Loan Prospector systems. Each agency’s system is based on its respective underwriting guidelines, which analyzes the borrower’s credit history, capacity and collateral to approve or deny loan eligibility.

Procedurally, the information provided by the borrower(s) on the standardized residential loan application is uploaded into the DU or LP system, along with credit report data, and “eligible” or “ineligible” DU findings or LP renderings are provided for the proposed transaction. Eligible means the data submitted meets the loan guidelines, pending receipt and manual review of the documentation provided by the borrower(s) to support the information provided on the application.  

Today, virtually all loan submissions underwritten through an automated system. FICO credit scores are a vital component in determining eligibility and to set risk-based pricing in both the DU and LP systems.  

Most clients assume their credit score will be the same regardless of who orders the credit report. The reality is that the FICO score can vary depending on the type of credit applied for and whom you choose as a lender. If you obtain your credit score through most of the free credit report websites that offer a score, it is likely not a FICO credit score. Most of those sites are using what is known as the VantageScore or Vantage credit score. 

The Fair Credit Reporting Act was amended in 2003 to require each of the three major credit reporting agencies (Experian, Equifax and TransUnion) to provide a free credit report once a year to every consumer that requested one. The purpose of the amendment was to allow consumers a way to ensure their reported credit information is correct, and to guard against identity theft.  

A short time later, the three credit reporting agencies formed a joint venture entity, whose goal was to develop a credit scoring algorithm to compete with the better known FICO score. I’m guessing that providing a credit score along with the free credit report and not paying for the FICO score was discussed. The rollout version of VantageScore in 2006 was the result of that collaboration. Although the initial version was on a different scale than FICO, the most recent revisions have a 300 to 850 scale, just like the FICO scoring model.

The initial use and primary market for the alternative credit scores were as an “educational credit score.” A consumer monitoring their “financial health” would see similar patterns for improvement or deterioration of their FICO and Vantage score based on the same credit-related activity.   

Almost all mortgage lenders require FICO scores, as opposed to the alternative VantageScore model, and use the Residential Mortgage Credit Report (RMCR) product. The RMCR provides additional information useful to underwriting a mortgage; including legal records, residence and employment history, along with the FICO score calculated using one of several available FICO scoring platforms. Yes, there is more than one FICO scoring platform available to lenders.

For mortgage lending, “your FICO score” is the middle of the three bureau FICO scores included with the RMCR product. If you are applying for a credit card or an installment loan, “your credit score” is likely a single bureau score from the FICO bank card, FICO auto score, or maybe even the VantageScore product lines. That’s a big part of why “your credit score” is not always the same.  RL

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