April 30, 2015
What can a borrower do with little to no credit? They are often in a tough predicament - they need that credit history to take out a loan, but without that credit history they could rarely get a loan with favorable terms.
One recent borrower-related benefit has been the government mortgage companies. For example, real estate economics and analytics firm Zillow reported that looser mortgage lending standards have made it easier for borrowers with low scores to get a home loan.
Another asset for consumers could even be FICO itself, which has recently announced it is working on a new score that would cater to underbanked borrowers.
The idea behind the score
According to American Banker, there is a substantial market for unscoreable borrowers in the U.S., as roughly 50 million Americans have little or no credit history. This doesn't include borrowers with poor credit histories, but it does cover those who have borrowed little or are young.
Due to this untapped market, FICO is working on a new score that allow lenders to properly assess borrowers with a score traditionally too low for a loan or credit card. The goal is to open up this demographic for lenders.
American Banker highlighted several key benefits of the new FICO score, including:
Even with these benefits, however, concerns remain among the banking community.
Skepticism reigns supreme
While the new score would open up more potential borrowers for lenders, the question remains of whether or not this is worthwhile - or if these borrowers are beneficial for lenders at all.
Since the FICO announcement, American Banker reported that several industry leaders have expressed skepticism about the viability and profitability of the new FICO score. One of those leaders is Al Engel, chief retail lending officer at New Jersey-based Valley National Bancorp.
"We look at everything that comes down the road, but I have not personally seen something that I feel is superior to what FICO has already created and supported through the years," Engel told American Banker.
One the one hand, supporters of the new FICO score believe that it could save lenders time and money and make it easier for consumers to have access to credit. On the other hand, it could be the reinvention of a wheel that is working perfectly fine as it is.