FICO Launches New Index to Measure Borrowers’ Credit Resilience
Written By: Joel Palmer, Op-Ed Writer
Last week, FICO launched its Resilience Index to help lenders predict how resilient a person’s credit may be in the event of an economic downturn.
FICO said the new index identifies borrowers that have more resilient credit during “an unexpected economic disruption,” such as the current COVID-19 pandemic. FICO noted that credit access tightens during down economies as lenders mitigate credit risk.
“During economic uncertainty, lenders and investors need to be able to evaluate and balance portfolios based on rapidly changing conditions,” FICO wrote on its blog. “This helps further the safety and soundness in credit, as well as support the global economy. By actively working with lenders and consumers to navigate the current situation, it is apparent that precise analytics are as important as ever to help avoid over-tightening of credit, which can delay an economic recovery.”
FICO said borrowers with higher credit resilience include those with more experience managing credit, lower revolving balances, fewer active accounts and fewer credit inquiries in the previous year.
The Resilience Index uses only credit bureau information. FICO said it evaluated hundreds of thousands of anonymous credit profiles from several time periods, including before and after the economic crisis of 2008. The company looked for patterns in consumers’ profiles and identified those they considered more sensitive to financial stress, which presented a greater risk of default.
Unlike the FICO Score, which ranges from 850 to 300, the FICO Resilience Index uses a scale from 1-99. Consumers with scores in the 1 to 44 range are viewed as the most prepared and may be more resilient in the event of an economic downturn.
Realtor.com published a column supporting the new index. It cited the increasing trouble borrowers were having in obtaining credit, despite record-low mortgage rates. The trouble is that the traditional credit score does not take into account whether a borrower received mortgage forbearance because of this year’s COVID-19 pandemic.
"It's a step in the right direction," said realtor.com Senior Economist George Ratiu. "Just one number, the traditional FICO score, shouldn't be the sole metric in determining a borrower's ability to repay a loan. For a lot of lenders in the current environment, the FICO score is not a clear indicator of a consumer’s current financial health.”
According to FICO’s statement, nearly 600,000 additional mortgages could have been originated to borrowers with FICO scores between 680 and 699 between 2010 and 2015 using the Resilience Index. This is based on data by Tom Parrent, a former chief risk officer for Genworth Financial.
In a new white paper, Parrent called the FICO Resilience Index, “a significant step forward in consumer credit modeling” and “a significant addition to the toolkits used by risk managers, portfolio managers, loan servicers, originators and regulators,” with a wide range of use cases for the mortgage industry, ranging from stress testing to risk-based pricing to loan servicing.
In addition to evaluating credit worthiness, FICO said the new index can help lenders:
Better gauge and manage overall portfolio vulnerability by enabling risk officers, regulators and investors to monitor the quality and resilience of a portfolio throughout economic cycles.
More precisely set capital requirements to comply with the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Tests (DFAST).
Identify more resilient consumers so that they can optimize capital and reduce loan loss allowance estimates.
Provide more transparency within the secondary market by adding another layer of data and insight.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
