Everything That's Wrong In The World Is FICO's Fault

Subscribe Now!

Stay on top of all the latest news and trends in banking industry.

Untitled(Required)

While putting away some of the leftovers from dinner the other night, I pulled a dish out of the cupboard, and before I knew it, it fell to the floor and broke.

I’m pretty sure it was FICO’s fault. (You read that right, FICO — as in the Fair Isaac credit score).

Why was it FICO’s fault? Well, I figure since everybody else seems to be blaming FICO for all the troubles in the world, I might as well, too.

First came BusinessWeek, which wrote “the once-vaunted FICO credit scoring system is now being blamed for failing to flag risky home-loan borrowers.” Then the folks over at Gonzo Banker wrote:

For all the high levels of rocket science and statistics deployed, it’s clear that lenders have been lulled into underwriting laziness by the FICO score….By relying on automation to create credit scores which rely on historical patterns in a person’s credit file, a tremendous amount of credit was granted to people that, quite simply, could not and cannot afford it.”

My take: FICO is not only responsible for the credit crunch, it’s the cause of world hunger, poverty, and my dropping a dish. OK, just kidding.

What rankles me is the piling on by Biz Week, Gonzo, and other observers against the same FICO score that many of them heralded as the best predictor of everything from loan creditworthiness to P&C insurance policy-worthiness to even future job success.

Let me see if I have this straight: A few years ago, many consultants urged financial services firms to use the FICO score to automate more of their lending decisions to cut costs and speed up cycle time. As common wisdom held, not only would they make decisions faster, but they would attract more apps because of their superior cycle time. But, according to many of these same consultants, thse financial firms that did this are at fault for spurring the credit crunch by relying on automation?

[Note: I’m really not trying to take a swipe at the folks over at Cornerstone, who write the Gonzo Banker site. I have a lot of respect for Steve Williams and his colleagues there. For all I know, Cornerstone was not one of the firms urging FIs to automate using the FICO score.]

Blaming the FICO score is misplaced. According to the Business Week article:

The average FICO score of borrowers who stopped making home-loan payments was 589 in 2001, compared with 620 for those who were paying on time—a 31-point difference that pointed to FICO’s predictive ability. By 2006, as subprime loan volume was surging, the gap had closed to just 10.”

Let me introduce a new term to some in the financial services community: Calibration. If you have a scale, and you find that it’s consistently 2 ounces off, you recalibrate it to adjust for the skewing. There’s no reason why FIs couldn’t have recalibrated, and adjusted their policies to account for the closing gap.

I’m a lot more inclined to agree with Jeremy Siegel, professor at the University of Pennsylvania, who wrote in Kiplingers:

…it was the free-market zeitgeist, which encouraged the creation of easy-money mortgages and their enthusiastic purchase by yield-hungry investors, that ultimately led to the credit fiasco.”

And I would have fully agreed with him if he would have added “consumers who knowingly and willingly borrowed way beyond their means.”

The point that Dr. Siegel makes (in my opinion), is that the credit crunch is not a simple situation with a simple cause and effect dynamic. It’s a complicated problem, caused by many factors, few of which are easily controlled.

The comments from the Business Week and Gonzo Banker point, however, to a bigger issue: The inability for people to take the blame for their own mistakes.

Spill a cup of coffee on yourself? Sue the place that sold it to you! Drive too fast and crash your car? Blame it on the car manufacturer for making a car that goes too fast! Made too many loans to people who can’t pay because you relaxed your credit policies to capitalize on the strong demand for home loans? Blame it on FICO! I’m sure it’s the score’s fault — after all, it made me break a dish.

3/14 UPDATE: For an excellent follow-up to this, see Bhupendra’s post.
Technorati Tags: Marketing, Banking, FICO, Gonzo Banker

This article was originally published on . All content © 2022 by The Financial Brand and may not be reproduced by any means without permission.