21 ms·

FICO and the Credit Bureau Cartel

124 points by Harmohit 2y ago

Harmohit 2y ago
I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings. It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".
- akira2501 2y ago
  > and take appropriate action Presumably the reason they have a lower score than desired is because they already failed to do this in one form or another. > "5 ways to quickly improve your credit score". Have no inquiries. Have no forced account closures or writeoffs. Have as much total open credit as you can without triggering the first two. Have at least one secured or unsecured installment loan open and then paid off every 5 years. Always pay your bills on time. It's not quick, I suppose, but the recipe is already pretty well known.
  - Dalewyn 2y ago
    Pretty much, yeah. A credit score is a descriptor of the risk of financial loss when lending the individual concerned some money. So the only real way to grow and keep the score high is: * Pay your credit card and loan statements when they are due (late payments imply you don't have money). * Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money). * Don't max out your credit limits if possible (you're taking and maxing out lines of credit, implying you don't have money). * Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money). * Keep doing all of the above for many years (a good credit score implies you have money and will pay back debts incurred). There's no magic or mystery to it, it just takes a lot of time to grow and keep high because you're building and maintaining trust with banks. You know that old saying? Trust is built over years but destroyed in a second? Yeah.
    - ykonstant 2y ago
      More than half of the above don't imply that you don't have money. Lack of money is only one of the possible reasons for those situations. * an inquiry means you're asking for a loan, implying you don't have money Entities with tons of money seek loans all the time for liquidity and risk mitigation. * you're taking and maxing out lines of credit, implying you don't have money Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially. * Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money). What in tarnation. This entire charade is a grotesque dance of mad clowns.
      - Dalewyn 2y ago
        >Lack of money is only one of the possible reasons for those situations. As far as a lender is concerned, if you don't pay back your debts you might as well not have money even if you actually do. >Entities with tons of money seek loans all the time for liquidity and risk mitigation. And each and every one of those inquiries will lower your credit score, because you're taking on more debt. Do you have money? Will you pay the debt back? The more inquiries there are (the more you ask for loans) in a given span of time, the less likely it is you have money and will pay debts back. >Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially. Banks hate seeing lines of credit maxed out. Ask any banker worth his salt and they will all tell you the same. If it wasn't obvious already, banks don't like lending money. That might sound strange, but for a bank (the lender) a loan is an investment and investments are risks. The more loans (debt) someone has, the more risk they are carrying and thus their credit score will reflect that. >What in tarnation. A line of credit in good standing that has been open for a long time means you've been making your payments properly, meaning the risk of lending money to you is lower than someone who does not have a line of credit as old. Thus, your credit score will be higher. The age of your credit is usually determined by your oldest open line(s) of credit. Closing an old line of credit means it will eventually fall off your credit report and stop being reflected in your credit score, which will fall to reflect the new and younger age of your credit. Again: Everything about credit score is solely about the risk you might pose to a lender. Anything that increases that risk will lower the score, and vice versa, even if it's just an implication.
  - ourmandave 2y ago
    Thinking of my last loan application, they ask you if you own or rent and how long you've been at that address. Also current job and income and how long there.
    - jon-wood 2y ago
      At least in the UK this is done as well as pulling your credit score, traditionally it's not a factor feeding into your credit score. Banks check both your history of paying off debts and your ability to continue doing so, it doesn't matter how good your score is, if you ask for an unsecured loan that's 20x your annual income over the next 5 years it's going to get refused. This is all somewhat complicated by recent products from credit agencies, which make use of the Open Banking standard to pull data direct from your bank accounts and use that data to feed into credit scoring as well.
- astura 2y ago
  FICO already tells you what goes into their scoring algorithm. It's not a mystery. https://www.myfico.com/credit-education/whats-in-your-credit-score https://www.myfico.com/credit-education/whats-in-your-credit...
  - standardUser 2y ago
    These agencies had far less regulation and transparency before Dodd–Frank in 2010.
    - astura 2y ago
      So?
  - isthatafact 2y ago
    I was curious, so I checked that page and did not find the equation used to calculate the "score", only vague hints. Is there a formula, spreadsheet, or code that people could use to verify their score? Or is it indeed a mystery?
- alistairSH 2y ago
  Not only do banks and credit agencies provide a "recipe" for improving your score, most do so free of charge (for existing customers). For example, I know my score swings by +/-30 points/month. I'm fairly confident that is due to the balance on my CCs varying when the score is calculated (there is nothing else about my financial situation changing - same house for a decade, same car loan for 5 years, no new credit lines/loans, etc). But, I pay the cards off every month, and the score always rebounds.
  - matwood 2y ago
    Mine swings monthly for the same reason, though not as much. The report I get tells me why it swings ('used credit balance').
    - alistairSH 2y ago
      Yeah, I was surprised at how much it swings, but it's high enough it shouldn't matter (and easy enough to not use the cards for a month, let it rebound, then borrow whatever I need to borrow). The report from my bank never says why. It does list factors that contribute to my score, but they're all "good" (low usage as % of available, all payments on time, etc). And never change.
      - matwood 2y ago
        I'm signed up for all the credit bureaus free accounts so I can freeze/unfreeze my credit. They send out reports monthly, along with one of my CCs. All of them have the reason. And yeah, the score is ~800 so it doesn't really matter. Still interesting to see how it moves with relatively small balance changes.
  - jjav 2y ago
    > I'm fairly confident that is due to the balance on my CCs varying when the score is calculated Yes. It feels wrong that the current balance of credit cards is considered debt. It should only be considered debt once (if) you start paying interest on it. So if you pay it off fully every month, it shouldn't be seen as debt. But whatever, they consider it debt so it can make the credit score swing up and down a lot. I see this every late summer when I pay my childs school bill for the upcoming year on a credit card. It is a very large amount so suddenly my credit utilization goes up and my credit score drops around ~70 points. Then a month later I pay it off and the credit score goes back up the same ~70 points.
asah 2y ago
seems like a startup opportunity - start with a well-defined subset of consumers where you can beat FICO in accuracy, then expand out. Don't compete on price, win on detail and quality.
- steveBK123 2y ago
  I think this is what all the BNPL startups claim to be doing except they see worse losses than the OG banks/credit card issuers that use FICO, etc...
- tryptophan 2y ago
  Well the problem is that anti-"discrimination" laws will kill that startup if that "well defined subset of consumers" doesn't have enough black people. Same reason IQ tests are banned and credit scores are only allowed to consider like 7 factors.
  - CPLX 2y ago
    As the article outlines in detail, this is definitely not the problem in this market.
- vegetablepotpie 2y ago
  > FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. The problem is that your competition is engaged in anti-competitive practices. Any bank can make an underwriting model, and the large banks already have enough data to pull it off. They haven’t done it, and they won’t do it because the agreements they’ve made with FICO makes implementing that impossible and Government agencies require FICO. If a startup wants to change this, they better get real good at lobbying because government policy is the biggest constraint.
- CPLX 2y ago
  As the article makes perfectly clear there are a series of anti-competitive actions in place that make it quite literally for a startup to compete. As described in the story the fucking CREDIT BUREAUS themselves were unable to launch a competing scoring model due to monopoly lock in effects.
steveBK123 2y ago
I would point out that "400% increase in mortgage credit check fees" sounds probably a lot worse than the actual number - which is like.. $150 at the time you are getting a mortgage. Of all the fees associated with buying your average $400k home, I don't think the $150 credit check fee is the big pain point. Title insurance is a much bigger scam/cost. The various state & local taxes at closing are orders of magnitude higher. Not to mention brokers fees (which are somewhat being handled as of late).
- CPLX 2y ago
  It’s an application fee so it applies just for trying to get a mortgage, which is entirely different. The mortgage companies have to pay it even for applicants that don’t end up actually becoming customers.
  - Retric 2y ago
    Which means they need hand those costs to the people who actually get a mortgage, meaning you’re probably paying closer to 500$ than 150$.
- deleted 2y ago
  [deleted]
- mschuster91 2y ago
  > Title insurance is a much bigger scam/cost. Given the horror stories that crop up regularly on HN or Reddit, these insurances actually make sense.
  - ghaff 2y ago
    In the US, it's unrealistic to assume there's a canonical federal database which tracks every potential title complication including property tax liens at the local level. In my case, I had a (resolved) issue where the property/house I was buying was a subdivided larger property with an agricultural lien (for an apple orchard) that hadn't been lifted yet. Titles have a lot of opportunities for complications in many places; there's no simple technology fix. The insurance is annoying but it's an area that has the potential for really expensive issues.
bluedays 2y ago
Looks like most people commenting didn’t read the article.
miki123211 2y ago
If you think this is a "capitalists being evil" problem and not an "regulators over-regulating" problem, you should pay particular attention to fragments of the article: > It’s not that hard to come up with a model for underwriting that is reasonably accurate; any bank with scale could probably do it. But FICO uses trade secrets, copyright, patents, or restrictive contracts to block anyone from doing so. > First, the government guarantees most mortgages through Fannie Mae and Freddie Mac [...]. This complex process relies on a standard to price the loans, and that standard is FICO, > A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore. Only, it got backlash from Wall Street, which didn’t want to bother changing their models for mortgage backed securities. Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both. In short, the federal government essentially requires everybody to use the services of one specific private company. This company can raise prices not because it's anticompetitive, but because the government doesn't allow it to have any competition. Perhaps, instead of trying to pass even more regulation, that government should just relax its restrictions and allow other participants on the market to compete fairly?
- chuckadams 2y ago
  > a "capitalists being evil" problem and not an "regulators over-regulating" problem ¿Por que no los dos? A cartel enshrining itself into law is Regulatory Capture 101.
- idiotsecant 2y ago
  I don't think the solution is less regulation. When you let the banks play fast and loose with the rules, they will. See 2008. The real answer is an open source credit model. We don't need a black box. Let private industry handle the credit line qctivity reporting part like they do now and just feed that info into an open source model. Done.
  - wiltonn 2y ago
    Agree with the open source credit model, and so do many governments. Open Banking is gaining traction, in Canada a new law called the Consumer Driven Banking Act was just enacted that aligns with UK Open Banking model. While the legislation does not explicitly call out open source credit model, the legislative frameworks are being setup that align with open source model. The government mandate is: "to establish a framework within which consumers, including small businesses, can direct that their data be shared among participating entities of their choice and to ensure that the sharing of data among participating entities is safe and secure." While the mandate does not call out the implementation method, this could be conceived as open source credit. Minimally it will chop down some of the legal roadblocks the incumbents use to maintain market power. I am surprised Matt doesn't mention Open Banking in the article, not sure if US lawmakers have been exploring this.
WaitWaitWha 2y ago
> Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless. This isn't completely correct. For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. It did require me to show my assets and income flow, but the Credit Union was able to provide me with a loan. The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice. > ... FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. ... > ... all three bureaus plus FICO have massive pricing power. > ... come to a set of arrangements to jointly hike prices This cartel will never be broken up. Too much money goes into the politicians pockets to move for break-up.
- simfree 2y ago
  A good credit union will bring loans to the board of trustees and often approve them when no Bank will. For most individuals, building a relationship with a local credit union is an asset in and of itself.
- JackFr 2y ago
  > For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. The credit union was content to use its own capital and hold your loan to maturity on its books. (I'm presuming you were probably a banking customer of the credit union, though I realize not necessarily.) Non-credit union lenders though most often want to either sell your loan to investors or pledge it as collateral to borrow money for themselves, and for that they need a FICO. > The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice. That's not really true. Using a credit card for most of your expenses and paying it off in full every month is actually a great boost to your credit score. It's both an indication that you live within your means and you honor your agreements.
ensignavenger 2y ago
There is an interesting dynamic here, one government agency, the FHFA, dictates that mortgage brokers have to use FICO and all three major credit bureaus, explicitly granting these companies a government enforced monopoly. Another government agency with different goals, the CFPB, comes in and complains about the price these government granted monopolies are charging and proposes regulation to limit it. These dueling agencies may eventually find a balance, with the FHFA dictating which companies services have to be used and the CFPB dictating how much those services can charge... The whole thing is a failure not of free markets but of different government regulators not coordinating their regulations.
balderdash 2y ago
The ridiculous thing is that the FICO score is so focused on commercial profitability rather than risk. You get lower score if you as a consumer optimise your cost of credit, price shopping/taking advantage of new rates/offers… it’s really a credit and likely profitability score
- Workaccount2 2y ago
  I have an 800 score while always being tight with my wallet. The most valuable thing to lenders is someone who can 100% be counted on to always pay, even if things outside their control turn against them. People chronically fail to understand this, and end up putting themselves in financially precarious situations i.e. paycheck-to-paycheck living.
  - SpicyLemonZest 2y ago
    I do not have an 800 score despite never missing a payment on any account. I don’t know why my score is lower (they don’t tell you!) but my general understanding is that the original commenter is right and my score would be higher if I had more credit products.
    - balderdash 2y ago
      Yeah payment history is only 35% of your score, amount of debt is 30% of your score (stupidly they want that to be below 7% of available (revolving credit) - meaning they penalise if you spend $1k/month on a credit card (and pay it off each month) and your limit is $10k, where as if your limit was ~$16k they look upon it favourably), length of history 15% (changing loan providers or credit cards hurts you here - despite flawless payment history), credit mix 10% (so if you just have credit cards this hurts you)
  - balderdash 2y ago
    Yes, but credit scores penalise people for many actions that have more to do with being perceived to bad customers than bad credit risks.payment history is only 35% of your score and and if you add it credit utilization, your only talking about ~2/3s of the score… You can’t get a perfect score if you change credit cards on a regular basis or cancel a zero balance card, people have worse credit because they paid off their student loans years ago or bought an older/cheaper car with cash as opposed financing one (less credit “diversity”) all of these things penalize people who have always paid their bills
exabrial 2y ago
I'm not sure how many times we're going to re-learn this lesson: * You cannot regulate a monopoly into good behavior. Recent example: Apple. * You must destroy it. All of these regulatory bureaus are a waste of time. Let the FTC loose like a Mantura.
- BugsJustFindMe 2y ago
  > Let the FTC loose like a Mantura. The wind instrument?
Aspos 2y ago
Twenty or so years ago Experian and FairIsaac were paid by USAID to help build credit bureau infrastructure in Kazakhstan. USAID also paid their legal departments to help draft a law which would govern the whole process. And guess what, in the result we got much fairer, more efficient, far more future-proof infra than the US has today. Gov licenses credit bureaus and runs its own one. Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one. Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau. Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better. Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all. It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing. So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market. The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks. Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.
- Workaccount2 2y ago
  I think the idea is in good spirit, but it's important to be aware that gov backed services often run at a loss indefinitely. It's impossible to compete with a business that doesn't need to make money to exist. So you end up with just the government service.
  - CoolGuySteve 2y ago
    Yeah that's why the only and best way to send packages here is the USPS.
  - Aspos 2y ago
    I see why you have this assumption, yet we have 20+ years of data proving that a private bureau can actually compete, flourish and innovate while serving majority of the reports while gov-run bureau ensures that prices stay manageable.
Nifty3929 2y ago
Lenders have to request a credit score from one of these agencies, because that's what Fannie Mae and Freddie Mac require. This is about regulatory capture, which is of course entirely within the control of the regulators, and very indirectly by voters at the ballot box. We continue to vote for politician who allow this to continue. We can't be taken advantage of without our (collective) permission. Let's vote for some folks that remove the regulatory capture and free up lenders (really loan originators, of which there are a great many) to compete for borrowers by (in some cases) dispensing with the credit score and other items.
kmeisthax 2y ago
> In other words, national credit reports are foundational to modern American society, binding us to one another financially as a nation through a network of computerized records. And that national market of identity is relatively new. Until 1970, credit reporting was localized, mostly through coops of town bankers who hired detectives to investigate borrowers, collecting gossip from snitches about who drank too much, who was a Communist, who slept around, and so forth. : Wait, it's all social credit? : Always has been.

124 points by Harmohit 2y ago

I wonder if open source software can play a role in this. Maybe we can have an open source algorithm for determining credit ratings and private companies only provide a secure database of ratings. It will also offer the lay person insights into how the credit rating is exactly determined. They can know what is causing their rating to be less than desired and take appropriate action, instead of watching a random youtube video titled "5 ways to quickly improve your credit score".

akira2501 2y ago
> and take appropriate action Presumably the reason they have a lower score than desired is because they already failed to do this in one form or another. > "5 ways to quickly improve your credit score". Have no inquiries. Have no forced account closures or writeoffs. Have as much total open credit as you can without triggering the first two. Have at least one secured or unsecured installment loan open and then paid off every 5 years. Always pay your bills on time. It's not quick, I suppose, but the recipe is already pretty well known.
- Dalewyn 2y ago
  Pretty much, yeah. A credit score is a descriptor of the risk of financial loss when lending the individual concerned some money. So the only real way to grow and keep the score high is: * Pay your credit card and loan statements when they are due (late payments imply you don't have money). * Keep credit inquiries to the minimum necessary (an inquiry means you're asking for a loan, implying you don't have money). * Don't max out your credit limits if possible (you're taking and maxing out lines of credit, implying you don't have money). * Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money). * Keep doing all of the above for many years (a good credit score implies you have money and will pay back debts incurred). There's no magic or mystery to it, it just takes a lot of time to grow and keep high because you're building and maintaining trust with banks. You know that old saying? Trust is built over years but destroyed in a second? Yeah.
  - ykonstant 2y ago
    More than half of the above don't imply that you don't have money. Lack of money is only one of the possible reasons for those situations. * an inquiry means you're asking for a loan, implying you don't have money Entities with tons of money seek loans all the time for liquidity and risk mitigation. * you're taking and maxing out lines of credit, implying you don't have money Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially. * Keep old credit cards open even if you don't use them, if it's practical (a longstanding open line of credit implies you have money). What in tarnation. This entire charade is a grotesque dance of mad clowns.
    - Dalewyn 2y ago
      >Lack of money is only one of the possible reasons for those situations. As far as a lender is concerned, if you don't pay back your debts you might as well not have money even if you actually do. >Entities with tons of money seek loans all the time for liquidity and risk mitigation. And each and every one of those inquiries will lower your credit score, because you're taking on more debt. Do you have money? Will you pay the debt back? The more inquiries there are (the more you ask for loans) in a given span of time, the less likely it is you have money and will pay debts back. >Nope, lack of understanding how CC scoring works (scoring designed to keep you in the credit mill) can lead to maxing out while being perfectly comfortable financially. Banks hate seeing lines of credit maxed out. Ask any banker worth his salt and they will all tell you the same. If it wasn't obvious already, banks don't like lending money. That might sound strange, but for a bank (the lender) a loan is an investment and investments are risks. The more loans (debt) someone has, the more risk they are carrying and thus their credit score will reflect that. >What in tarnation. A line of credit in good standing that has been open for a long time means you've been making your payments properly, meaning the risk of lending money to you is lower than someone who does not have a line of credit as old. Thus, your credit score will be higher. The age of your credit is usually determined by your oldest open line(s) of credit. Closing an old line of credit means it will eventually fall off your credit report and stop being reflected in your credit score, which will fall to reflect the new and younger age of your credit. Again: Everything about credit score is solely about the risk you might pose to a lender. Anything that increases that risk will lower the score, and vice versa, even if it's just an implication.
- ourmandave 2y ago
  Thinking of my last loan application, they ask you if you own or rent and how long you've been at that address. Also current job and income and how long there.
  - jon-wood 2y ago
    At least in the UK this is done as well as pulling your credit score, traditionally it's not a factor feeding into your credit score. Banks check both your history of paying off debts and your ability to continue doing so, it doesn't matter how good your score is, if you ask for an unsecured loan that's 20x your annual income over the next 5 years it's going to get refused. This is all somewhat complicated by recent products from credit agencies, which make use of the Open Banking standard to pull data direct from your bank accounts and use that data to feed into credit scoring as well.
astura 2y ago
FICO already tells you what goes into their scoring algorithm. It's not a mystery. https://www.myfico.com/credit-education/whats-in-your-credit-score https://www.myfico.com/credit-education/whats-in-your-credit...
- standardUser 2y ago
  These agencies had far less regulation and transparency before Dodd–Frank in 2010.
  - astura 2y ago
    So?
- isthatafact 2y ago
  I was curious, so I checked that page and did not find the equation used to calculate the "score", only vague hints. Is there a formula, spreadsheet, or code that people could use to verify their score? Or is it indeed a mystery?
alistairSH 2y ago
Not only do banks and credit agencies provide a "recipe" for improving your score, most do so free of charge (for existing customers). For example, I know my score swings by +/-30 points/month. I'm fairly confident that is due to the balance on my CCs varying when the score is calculated (there is nothing else about my financial situation changing - same house for a decade, same car loan for 5 years, no new credit lines/loans, etc). But, I pay the cards off every month, and the score always rebounds.
- matwood 2y ago
  Mine swings monthly for the same reason, though not as much. The report I get tells me why it swings ('used credit balance').
  - alistairSH 2y ago
    Yeah, I was surprised at how much it swings, but it's high enough it shouldn't matter (and easy enough to not use the cards for a month, let it rebound, then borrow whatever I need to borrow). The report from my bank never says why. It does list factors that contribute to my score, but they're all "good" (low usage as % of available, all payments on time, etc). And never change.
    - matwood 2y ago
      I'm signed up for all the credit bureaus free accounts so I can freeze/unfreeze my credit. They send out reports monthly, along with one of my CCs. All of them have the reason. And yeah, the score is ~800 so it doesn't really matter. Still interesting to see how it moves with relatively small balance changes.
- jjav 2y ago
  > I'm fairly confident that is due to the balance on my CCs varying when the score is calculated Yes. It feels wrong that the current balance of credit cards is considered debt. It should only be considered debt once (if) you start paying interest on it. So if you pay it off fully every month, it shouldn't be seen as debt. But whatever, they consider it debt so it can make the credit score swing up and down a lot. I see this every late summer when I pay my childs school bill for the upcoming year on a credit card. It is a very large amount so suddenly my credit utilization goes up and my credit score drops around ~70 points. Then a month later I pay it off and the credit score goes back up the same ~70 points.

asah 2y ago

seems like a startup opportunity - start with a well-defined subset of consumers where you can beat FICO in accuracy, then expand out. Don't compete on price, win on detail and quality.

steveBK123 2y ago
I think this is what all the BNPL startups claim to be doing except they see worse losses than the OG banks/credit card issuers that use FICO, etc...
tryptophan 2y ago
Well the problem is that anti-"discrimination" laws will kill that startup if that "well defined subset of consumers" doesn't have enough black people. Same reason IQ tests are banned and credit scores are only allowed to consider like 7 factors.
- CPLX 2y ago
  As the article outlines in detail, this is definitely not the problem in this market.
vegetablepotpie 2y ago
> FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. The problem is that your competition is engaged in anti-competitive practices. Any bank can make an underwriting model, and the large banks already have enough data to pull it off. They haven’t done it, and they won’t do it because the agreements they’ve made with FICO makes implementing that impossible and Government agencies require FICO. If a startup wants to change this, they better get real good at lobbying because government policy is the biggest constraint.
CPLX 2y ago
As the article makes perfectly clear there are a series of anti-competitive actions in place that make it quite literally for a startup to compete. As described in the story the fucking CREDIT BUREAUS themselves were unable to launch a competing scoring model due to monopoly lock in effects.

steveBK123 2y ago

I would point out that "400% increase in mortgage credit check fees" sounds probably a lot worse than the actual number - which is like.. $150 at the time you are getting a mortgage. Of all the fees associated with buying your average $400k home, I don't think the $150 credit check fee is the big pain point. Title insurance is a much bigger scam/cost. The various state & local taxes at closing are orders of magnitude higher. Not to mention brokers fees (which are somewhat being handled as of late).

CPLX 2y ago
It’s an application fee so it applies just for trying to get a mortgage, which is entirely different. The mortgage companies have to pay it even for applicants that don’t end up actually becoming customers.
- Retric 2y ago
  Which means they need hand those costs to the people who actually get a mortgage, meaning you’re probably paying closer to 500$ than 150$.
deleted 2y ago
[deleted]
mschuster91 2y ago
> Title insurance is a much bigger scam/cost. Given the horror stories that crop up regularly on HN or Reddit, these insurances actually make sense.
- ghaff 2y ago
  In the US, it's unrealistic to assume there's a canonical federal database which tracks every potential title complication including property tax liens at the local level. In my case, I had a (resolved) issue where the property/house I was buying was a subdivided larger property with an agricultural lien (for an apple orchard) that hadn't been lifted yet. Titles have a lot of opportunities for complications in many places; there's no simple technology fix. The insurance is annoying but it's an area that has the potential for really expensive issues.

bluedays 2y ago

Looks like most people commenting didn’t read the article.

miki123211 2y ago

If you think this is a "capitalists being evil" problem and not an "regulators over-regulating" problem, you should pay particular attention to fragments of the article: > It’s not that hard to come up with a model for underwriting that is reasonably accurate; any bank with scale could probably do it. But FICO uses trade secrets, copyright, patents, or restrictive contracts to block anyone from doing so. > First, the government guarantees most mortgages through Fannie Mae and Freddie Mac [...]. This complex process relies on a standard to price the loans, and that standard is FICO, > A few years ago, the Federal Housing Finance Agency (FHFA), which runs most housing finance for the government through its control of secondary mortgage buyers Fannie Mae and Freddie Mac, decided that it might want to create some competition for FICO. So it turned to VantageScore. Only, it got backlash from Wall Street, which didn’t want to bother changing their models for mortgage backed securities. Instead of allowing mortgage lenders to pick either FICO or VantageScore, FHFA simply required that lenders use both. In short, the federal government essentially requires everybody to use the services of one specific private company. This company can raise prices not because it's anticompetitive, but because the government doesn't allow it to have any competition. Perhaps, instead of trying to pass even more regulation, that government should just relax its restrictions and allow other participants on the market to compete fairly?

chuckadams 2y ago
> a "capitalists being evil" problem and not an "regulators over-regulating" problem ¿Por que no los dos? A cartel enshrining itself into law is Regulatory Capture 101.
idiotsecant 2y ago
I don't think the solution is less regulation. When you let the banks play fast and loose with the rules, they will. See 2008. The real answer is an open source credit model. We don't need a black box. Let private industry handle the credit line qctivity reporting part like they do now and just feed that info into an open source model. Done.
- wiltonn 2y ago
  Agree with the open source credit model, and so do many governments. Open Banking is gaining traction, in Canada a new law called the Consumer Driven Banking Act was just enacted that aligns with UK Open Banking model. While the legislation does not explicitly call out open source credit model, the legislative frameworks are being setup that align with open source model. The government mandate is: "to establish a framework within which consumers, including small businesses, can direct that their data be shared among participating entities of their choice and to ensure that the sharing of data among participating entities is safe and secure." While the mandate does not call out the implementation method, this could be conceived as open source credit. Minimally it will chop down some of the legal roadblocks the incumbents use to maintain market power. I am surprised Matt doesn't mention Open Banking in the article, not sure if US lawmakers have been exploring this.

WaitWaitWha 2y ago

> Even if a lender thinks the customer would be a good risk, the lender has to buy a FICO score regardless. This isn't completely correct. For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. It did require me to show my assets and income flow, but the Credit Union was able to provide me with a loan. The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice. > ... FICO prohibits not only validating different models against FICO scores, but even displaying FICO scores next to non-FICO scores. ... > ... all three bureaus plus FICO have massive pricing power. > ... come to a set of arrangements to jointly hike prices This cartel will never be broken up. Too much money goes into the politicians pockets to move for break-up.

simfree 2y ago
A good credit union will bring loans to the board of trustees and often approve them when no Bank will. For most individuals, building a relationship with a local credit union is an asset in and of itself.
JackFr 2y ago
> For a period I had no FICO score, yet I was able to secure a loan from a Credit Union. The credit union was content to use its own capital and hold your loan to maturity on its books. (I'm presuming you were probably a banking customer of the credit union, though I realize not necessarily.) Non-credit union lenders though most often want to either sell your loan to investors or pledge it as collateral to borrow money for themselves, and for that they need a FICO. > The score from what I have gathered when I learn really rewards those who remain in debt and pay substantial interest, not the frugal and financially stable (check to check is not financially stable). Basically encouraging to keep self in debt just at the edge of financial disaster's precipice. That's not really true. Using a credit card for most of your expenses and paying it off in full every month is actually a great boost to your credit score. It's both an indication that you live within your means and you honor your agreements.

ensignavenger 2y ago

There is an interesting dynamic here, one government agency, the FHFA, dictates that mortgage brokers have to use FICO and all three major credit bureaus, explicitly granting these companies a government enforced monopoly. Another government agency with different goals, the CFPB, comes in and complains about the price these government granted monopolies are charging and proposes regulation to limit it. These dueling agencies may eventually find a balance, with the FHFA dictating which companies services have to be used and the CFPB dictating how much those services can charge... The whole thing is a failure not of free markets but of different government regulators not coordinating their regulations.

balderdash 2y ago

The ridiculous thing is that the FICO score is so focused on commercial profitability rather than risk. You get lower score if you as a consumer optimise your cost of credit, price shopping/taking advantage of new rates/offers… it’s really a credit and likely profitability score

Workaccount2 2y ago
I have an 800 score while always being tight with my wallet. The most valuable thing to lenders is someone who can 100% be counted on to always pay, even if things outside their control turn against them. People chronically fail to understand this, and end up putting themselves in financially precarious situations i.e. paycheck-to-paycheck living.
- SpicyLemonZest 2y ago
  I do not have an 800 score despite never missing a payment on any account. I don’t know why my score is lower (they don’t tell you!) but my general understanding is that the original commenter is right and my score would be higher if I had more credit products.
  - balderdash 2y ago
    Yeah payment history is only 35% of your score, amount of debt is 30% of your score (stupidly they want that to be below 7% of available (revolving credit) - meaning they penalise if you spend $1k/month on a credit card (and pay it off each month) and your limit is $10k, where as if your limit was ~$16k they look upon it favourably), length of history 15% (changing loan providers or credit cards hurts you here - despite flawless payment history), credit mix 10% (so if you just have credit cards this hurts you)
- balderdash 2y ago
  Yes, but credit scores penalise people for many actions that have more to do with being perceived to bad customers than bad credit risks.payment history is only 35% of your score and and if you add it credit utilization, your only talking about ~2/3s of the score… You can’t get a perfect score if you change credit cards on a regular basis or cancel a zero balance card, people have worse credit because they paid off their student loans years ago or bought an older/cheaper car with cash as opposed financing one (less credit “diversity”) all of these things penalize people who have always paid their bills

exabrial 2y ago

I'm not sure how many times we're going to re-learn this lesson: * You cannot regulate a monopoly into good behavior. Recent example: Apple. * You must destroy it. All of these regulatory bureaus are a waste of time. Let the FTC loose like a Mantura.

BugsJustFindMe 2y ago
> Let the FTC loose like a Mantura. The wind instrument?

Aspos 2y ago

Twenty or so years ago Experian and FairIsaac were paid by USAID to help build credit bureau infrastructure in Kazakhstan. USAID also paid their legal departments to help draft a law which would govern the whole process. And guess what, in the result we got much fairer, more efficient, far more future-proof infra than the US has today. Gov licenses credit bureaus and runs its own one. Banks must report to all licensed bureaus and may choose which bureau to pull reports from. This means a report from any bureau is as good as from any other one. Having a gov player in the market effectively creates a price ceiling, so a private bureau has to sell data for less than the government-run bureau. Private bureau has to keep innovating to justify its existence and thus keep creating new products which predict creditworthiness better and better. Credit report includes all the raw information, so banks are free to compute their own score and are not bound to anything stupidly archaic and awkward such as US FICO score, don't need to rely on any external score at all. It is the XXI century, computing a credit decision out of a few hundred datapoints takes milliseconds, costs nothing. So gov-run bureau sees a fraction of a % of the load yet effectively moderates the whole market. The largest private bureau is owned by banks (like VISA used to be) and thus is working in the best interests of the banks. Many (if not all) problems we see in the US financial sector are the result of regulatory and legislative negligence. Just some lazy folks trying to run things the way there were in the 80es.

Workaccount2 2y ago
I think the idea is in good spirit, but it's important to be aware that gov backed services often run at a loss indefinitely. It's impossible to compete with a business that doesn't need to make money to exist. So you end up with just the government service.
- CoolGuySteve 2y ago
  Yeah that's why the only and best way to send packages here is the USPS.
- Aspos 2y ago
  I see why you have this assumption, yet we have 20+ years of data proving that a private bureau can actually compete, flourish and innovate while serving majority of the reports while gov-run bureau ensures that prices stay manageable.

Nifty3929 2y ago

Lenders have to request a credit score from one of these agencies, because that's what Fannie Mae and Freddie Mac require. This is about regulatory capture, which is of course entirely within the control of the regulators, and very indirectly by voters at the ballot box. We continue to vote for politician who allow this to continue. We can't be taken advantage of without our (collective) permission. Let's vote for some folks that remove the regulatory capture and free up lenders (really loan originators, of which there are a great many) to compete for borrowers by (in some cases) dispensing with the credit score and other items.

kmeisthax 2y ago

> In other words, national credit reports are foundational to modern American society, binding us to one another financially as a nation through a network of computerized records. And that national market of identity is relatively new. Until 1970, credit reporting was localized, mostly through coops of town bankers who hired detectives to investigate borrowers, collecting gossip from snitches about who drank too much, who was a Communist, who slept around, and so forth. : Wait, it's all social credit? : Always has been.