September 19, 2000

The Honorable Marge Roukema
U.S. House of Representatives
Financial Institutions and Consumer Credit Subcommittee
2129 Rayburn House Office Building
Washington D.C. 20515-6050

Subject: H.R. 2856 and Related Issues

Dear Chairwoman Roukema:

Thank you for the opportunity on September 21, 2000 to testify regarding H.R. 2856 and other issues relating to the availability and use of credit scores, risk scores, and other predictors of credit risk.

My name is Cheryl (Cheri) St. John and I am a Senior Vice President and General Manager of Global Data Repository and Processor Alliances at Fair, Isaac & Co., Inc. ("Fair, Isaac"). Fair, Isaac is a global provider of customer analytics and decision technology. The company pioneered the development of statistically-based credit risk evaluation systems, commonly called "credit scoring systems," and is the world’s leading developer of those systems. Thousands of credit grantors use scores (commonly known as "FICOÒ scores") generated by Fair, Isaac-developed scoring systems implemented at the national credit reporting agencies, and Fair, Isaac has developed custom scoring systems for hundreds of the nation’s leading banks, credit card issuers, finance companies and retailers.

Over the last forty years credit scoring has become an essential part of most credit decisions. Fair, Isaac believes that some form of credit scoring is now used in the majority of consumer credit decisions, and the most widely used credit scores in the U.S. today are FICO scores.

Since 1988, both the Federal Trade Commission and Congress have considered proposed revisions and interpretations of the federal Fair Credit Reporting Act with regard to the disclosure of credit scores to consumers. After years of consideration on the issues, both the Federal Trade Commission and Congress concluded that mandating disclosure of scores to consumers by credit reporting agencies would not benefit consumers. One of the reasons for this conclusion is that existing federal law requires creditors to disclose to consumers why a credit application was declined. The federal Equal Credit Opportunity Act and Regulation B thereunder already provide consumers with the means to obtain the primary factors behind a decision resulting in an "adverse action" as defined by that regulation. If a credit score does not meet a creditor's cut-off and an application is declined, the creditor must disclose to the consumer the reasons for the declination. Currently, scoring systems provide information about the factors in a consumer's credit history which prevented the score from being more favorable. This information is passed to the consumer by the creditor in the adverse action notice.

Another reason that the Federal Trade Commission and Congress have declined to mandate score disclosure in the past is the conclusion that disclosure of scores to consumers by credit reporting agencies would only confuse most consumers rather than provide useful information. Fair, Isaac agrees with this conclusion for the reasons outlined below. We also support the goal of better informing consumers about credit scoring and how it is used in decisions affecting them.

Central to this hearing are questions of whether and how the disclosure of scores to consumers would provide them with beneficial information. Fair, Isaac supports disclosure of scores to consumers provided that such disclosure is conducted in a manner that provides meaningful and helpful information to consumers. Congress is currently reconsidering the issue of score disclosure in the context of H.R. 2856 which as currently drafted would "require the disclosure of all information in a consumer’s file at the time of the request, including credit scores, risk scores, and any other predictors." However, given the variety of existing scoring mechanisms and variations in how scores function in creditors' unique decision-making processes, Fair, Isaac believes the proposed language of H.R. 2856 will not result in the disclosure of meaningful information to consumers.

Moreover, given the dynamic nature of the credit industry and the complexities of the scoring mechanisms supporting this industry, legislation may not be the best mechanism for the beneficial impacts intended by legislative proponents. Fair, Isaac believes that the marketplace is developing solutions to a perceived consumer interest in information about scoring and its application to individual consumers. Such solutions are, in Fair, Isaac's view, a better solution than legislative initiatives. Let me provide further information in support of these positions and observations.

Disclosure of Scores to Consumers Without Appropriate Tools to Interpret the Scores is Unhelpful and Possibly Harmful

H.R. 2856 requires disclosure of just a credit score, in isolation. Generally consumers want to know either, "Why was I declined by the last lender I applied to?" or, "Will I be accepted by the next lender I apply to, and if not, what do I need to do to change that result?" Disclosure of a numeric score, by itself, does nothing to answer these questions, is not likely to be helpful to the consumer and may in fact be misleading or even harmful, for the following reasons:

1. There is not just one credit score corresponding to a given consumer’s file at a given credit reporting agency. Rather, there are dozens – perhaps hundreds – of scoring models that might be applied at the time a credit report is compiled. Some are generally available to all users who have a permissible purpose to access credit files; others may have been designed to meet the needs of a particular credit grantor and may only be used by that creditor. For example, a creditor specializing in granting credit to consumers who have filed for bankruptcy and are now trying to re-build a solid credit record, will need to consider the effect of a bankruptcy on credit risk differently than a more traditional lender and may have a scoring model developed to fit its market strategy.
2. Different scoring systems predict different dimensions of consumer behavior, some of which are opposing. For example, consumers who present a relatively high degree of credit risk are generally more likely to generate interest and/or revenue on a revolving credit product and more likely to respond to new offers of credit. A creditor offering a revolving credit product must balance the credit risk evaluation against revenue and response rate evaluations. A consumer who discovers that he or she has a high revenue score may mistakenly believe that his or her credit record is more favorable than it really is and fail to take appropriate actions to improve his or her record in anticipation of an application for a significant credit obligation, like a mortgage.
3. Credit scoring systems use different scaling conventions, just as thermometers use different temperature scales (Fahrenheit, Celsius, Kelvin, etc.). For some risk prediction systems (not developed by Fair, Isaac), a higher score indicates greater risk.
4. Not all risk is considered equal. The same consumer may present very different degrees of risk for different credit products, even if offered by a single lender. For example, the same consumer might present a 1 in 10 risk of defaulting on an unsecured credit card obligation, but a 1 in 100 risk in defaulting on a first mortgage obligation.
5. Lenders use scores differently. Different credit grantors have very different standards for what level of risk they will accept. A credit score that one lender considers satisfactory may be regarded as unsatisfactory by other lenders for comparable credit instruments.
6. Scores can change often. The score from any given system for a consumer depends on the information available at the time a credit report is compiled. For many consumers that information – and thus their scores – may change from day to day.
7. Other information and criteria besides credit scores are used in making lending decisions. A consumer can have a very good credit score and still not be approved for a loan due to other reasons, such as insufficient income or down payment.
8. In addition, credit scoring systems are designed to predict long-term credit performance. Attempts by a consumer to "fix" a credit score using short-term measures or temporary changes in behavior could be counter-productive and harmful to both the consumer (the attempt to raise a score could backfire, or the consumer may be approved for a monthly payment he or she is unable to handle causing further blemishes in his or her credit payment history) and to the credit grantor (who is trying to accurately assess longer-term risk). If a scoring system is subject to attempted manipulation, the integrity of the credit risk evaluation could be damaged. That would likely result in higher rates or less credit being granted, either of which is harmful to consumers in the long run. Consumers are best served by managing their credit responsibly over time, and only the lender can answer the question of how the consumer could improve his or her credit standing in the eyes of that lender.

It is for the above reasons Fair, Isaac feels that the score has the most meaning in the context of a specific lending decision. Neither the credit reporting agency nor Fair, Isaac can answer the questions: "Will I be approved?" or "Will I receive the best rate available?" Only lenders know which scores they use and how they are used in the decision, and can begin to answer the consumer’s real questions.

However, it’s not possible for anyone to answer the question, "What can I do to raise my score today in order to get approved tomorrow?" Scoring systems are inherently compensatory. A low score factor in one area can be made up by a high score factor in another area. As such, it is impossible to quantitatively answer the question, "If I pay off the balance of this obligation, how much will my score go up?" It depends on what other information is in the file, the prevalence and amount of other balances owing, how the balance is paid off (e.g., is it transferred to another credit card putting that obligation over limit?), and many other factors. In addition, everything else in the consumer credit file is not held constant and continues to change day to day. The reason credit scoring systems work so well is that they consider a great deal more compensatory factors than human judgment can weigh accurately, and do it in a fraction of a second.

As stated above, Fair, Isaac supports the goal of better informing consumers about credit scoring and how it is used in decisions affecting them, without damaging the integrity of the credit risk evaluation. Fair, Isaac is on record supporting the disclosure of credit scores to consumers in the context of a bona fide mortgage lending decision, provided it is the disclosure of the actual score(s) used, the score factor reasons, and the underlying credit report. We feel the importance of mortgage decisions is much greater to both lenders and borrowers than most other credit decisions. Thus, there is some assurance that the lender (or its representative, such as a broker) will make the effort necessary to explain, and the borrower will make the effort necessary to understand, the complex subject of credit scoring and its relationship to the overall mortgage lending process.

I’d like to take this opportunity to update the subcommittee on recent market initiatives Fair, Isaac has undertaken toward the goal of providing consumers with helpful and meaningful information about scoring systems and individual consumer scores.

First, this past June Fair, Isaac put extensive information on scoring in general, and FICO scores in particular, on its corporate Web site. Specifically, Fair, Isaac posted the complete set of factors that the FICO scores consider and the relative weighting of the different categories of factors. The Web site also explains the compensatory nature of scoring, cautions consumers against trying short-term "fixes," and offers helpful advice on how to improve one’s credit rating, as measured by the FICO score, over the long-term. For those without Web access, Fair, Isaac has re-printed its consumer booklet with this same information and is working with several agencies to reprint and distribute it to their constituents. Two copies of this booklet are attached to each copy of this testimony.

Second, Fair, Isaac is launching a FICO score explanation service that is currently in a beta release. This Web-based service would, for a fee, allow a user who has a permissible purpose to access the FICO score and the four reason codes (e.g., a mortgage broker or lender) to enter that information on behalf of the consumer, and receive back an individual explanation of how the consumer’s FICO score compares to a national distribution, plus an explanation of the four reasons and why the consumer didn’t score higher. Finally, useful advice is offered on how to improve the FICO score over time, based on the primary factors where the individual scored lowest. This service should aid brokers and lenders in better explaining FICO scores to their clients – consumers – should they choose to do so. Fair, Isaac has worked hard to balance the concern of short-term manipulation with the need to give consumers advice on how to improve their credit standing over the long-term.

Finally, Fair, Isaac recognizes the desire of some consumers to obtain a FICO score in advance of submitting a large financing application. Fair, Isaac supports a FICO score consumer delivery service, done properly. In order for a score to provide meaningful and helpful information outside the context of a lending decision, Fair, Isaac believes the score must be accompanied by the underlying credit report from which the score was computed, and a plain-language explanation of the primary reasons that the score wasn't more favorable. Finally, the credit risk score delivered to a consumer should be a score that is widely used in lending decisions. Fair Isaac has initiated discussions with the credit reporting industry regarding our interest in providing such a service to consumers under a separate agreement. This additional relationship is necessary because the scores are jointly developed products with each of the credit reporting agencies, and neither Fair, Isaac nor the credit reporting agencies can change the scope of those agreements unilaterally. Additionally, the FICO scores were developed as a tool for lenders to make better credit decisions. As such, the agreements assume our customers – the lenders – are buying the scores "in bulk." They do not address the financial, cost, or support implications of a single consumer obtaining a single score.

We believe that these efforts, along with recently-announced initiatives by other companies, will meet consumer demand for credit score information. Given the complexities surrounding the issue of score disclosure, Fair, Isaac believes that market forces will respond to consumer demand and meet consumer needs more effectively than legislation.

On behalf of Fair, Isaac, we appreciate the opportunity to provide this testimony on H.R. 2856, and will be happy to answer any questions on this topic now or in the future. Please feel free to contact me at (415) 491-5176 or cheristjohn@fairisaac.com.

Sincerely yours,

Cheryl St. John
Senior Vice President and General Manager, Global Alliances

Enclosure

Fair, Isaac and FICO are trademarks or registered trademarks of Fair, Isaac and Company, Inc. in the United States and/or in other countries. Other product and company names herein may be trademarks or registered trademarks of their respective owners.