FICO Plans Big Shift in Credit-Score Calculations, Potentially Boosting Millions of Borrowers

From today’s Wall Street Journal:

Credit scores for decades have been based mostly on borrowers’ payment histories. That is about to change.

Fair Isaac Corp. FICO -4.72% , creator of the widely used FICO credit score, plans to roll out a new scoring system in early 2019 that factors in how consumers manage the cash in their checking, savings and money-market accounts. It is among the biggest shifts for credit reporting and the FICO scoring system, the bedrock of most consumer-lending decisions in the U.S. since the 1990s.

The UltraFICO Score, as it is called, isn’t meant to weed out applicants. Rather, it is designed to boost the number of approvals for credit cards, personal loans and other debt by taking into account a borrower’s history of cash transactions, which could indicate how likely they are to repay.

The new score, in the works for years, is FICO’s latest answer to lenders who after years of mostly cautious lending are seeking ways to boost loan approvals.

This is occurring at the same time the consumer-credit market appears relatively healthy. Unemployment is low and consumer loan balances—including for credit cards, auto loans and personal loans—are at record highs, and lenders are looking for ways to keep expanding loan volume.

Borrowers currently have little control over what is in their credit reports, save for the ability to contest information they believe is inaccurate. Lenders, collections firms and other parties feed payment-history data to the major credit-reporting firms, Experian PLC,Equifax Inc. and TransUnion, and that information determines consumers’ FICO scores.

Read the complete article here.

Freezing Credit Will Now Be Free. Here’s Why You Should Go for It.

From today’s New York Times:

Consumers will soon be able to freeze their credit files without charge. So if you have not yet frozen your files — a recommended step to foil identity theft — now is a good time to take action, consumer advocates say.

Security freezes, often called credit freezes, are “absolutely” the best way to prevent criminals from using your personal information to open new accounts in your name, said Paul Stephens, director of policy and advocacy with Privacy Rights Clearinghouse, a consumer advocacy nonprofit group.

Free freezes, which will be available next Friday, were required as part of broader financial legislation signed in May by President Trump.

Free security freezes were already available in some states and in certain situations, but the federal law requires that they be made available nationally. Two of the three major credit reporting bureaus, Equifax and TransUnion, have already abandoned the fees. The third, Experian, said it would begin offering free credit freezes next Friday. To be effective, freezes must be placed at all three bureaus.

Read the complete article here.

Justice Department sues S&P over fraud in rating mortgage securities

This week the Justice Department announced a civil lawsuit against the credit rating agency Standard & Poor’s after a lengthy investigation. The suit alleges that the agency issued faulty credit ratings for securities tied to the “toxic assets” of mortgages and other financial instruments. The Justice Department claims that S&P’s purposely engaged in fraud by diluting their rating standards in order to generate business and accommodate long-standing clients.

The suit is being brought under a law passed in 1989 after the savings and loan crisis. The statutes in the Financial Institutions Reform, Recovery, and Enforcement Act make it easier to prosecute fraud cases against financial institutions. Since the case is civil it only requires the plaintiffs to show by a preponderance of evidence that S&P engaged in fraudulent activity such as giving subprime mortgages inflated credit ratings during the financial crisis. For example, the company rated numerous mortgage-backed securities highly, only to downgrade those same the securities quickly, leading to massive defaults in the final few months of 2007.

Then there is the usual array of inappropriate e-mails and text messages. One riffs on the Talking Heads song “Burning Down the House,” creating new lyrics: “Subprime is boi-ling o-ver. Bringing down the house.” Another e-mail from an analyst in response to a question about how his new job was going reads: “Job’s going great. Aside from the fact that the M.B.S. world is crashing, investors and the media hate us and we’re all running around to save face … no complaints.”

The complaint also included numerous emails from executives at the agency that Justice Department officials claim are proof that they knowingly inflated credit ratings and engaged in misconduct by deceiving investors. However, critics see a weakness in their case as other credit ratings agencies have not been sued, and since many of their ratings were the same as S&P’s, it is unclear whether executives will be able to say that they followed the lead of other third-party agencies such as Fitch and Moody’s. Given the industry-wide pattern of misinformation and risky behavior, the Justice Department’s suit is an important step in rectifying the egregious abuses of executives and companies in the financial world.

Moody’s downgrades world’s banks

In 2011, a Congressional Report was released exposing those financial institutions responsible for the recession. The finger was pointed squarely at large investment banks as well as credit rating agencies for colluding to undermine the checks and balances that are supposed to keep the latter impartial, so that investor’s can be confident their evaluations of the former are accurate.

The report found that both Moody’s and Standard and Poor’s were both complicit in rigging scores for those banks, as well as the toxic financial products they were selling to investors. Both agencies knew that banks were off-loading toxic assets in investment bundles that were bogus, but gave those same products high scores in order to attract investors to them. As a result, hundreds of billions of dollars of other people’s money was lost, banks made out big by betting against these toxic assets in the derivatives market, and credit rating agencies made large bonuses from those banks for their part in perpetuating lies to the public

What a difference a year makes. Yesterday, Moody’s announced it was downgrading 15 of the world’s largest financial institutions, including several major U.S. banks such as Citigroup and Bank of America. Once cozy in their collusion with these agencies, banks reacted swiftly and disingenuously to the news. Citigroup accused Moody’s of doing poor research and advised its investors to search for other agencies with credit ratings more favorable to it (and therefore probably false). The bank released a statement to the effect that Moody’s “fails to recognize Citi’s transformation over the past several years…Citi strongly disagrees with Moody’s analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted.”

Along with Citigroup and Bank of America, Moody’s evaluated 13 other banks:  Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Crédit Agricole, Société Générale, Royal Bank of Canada, and Royal Bank of Scotland.

Analysis was based on firms’ capital ratios and whether they would be able to survive so-called “stress tests” modeling another severe recession. Many of the largest U.S. banks failed those tests, or were close to failing, prompting the downgrade in their credit ratings.

For consumers, homeowners, small business owners and retirees the downgrade is too little, too late. In election year politics relief for these stakeholders has also been slim to none. Democrats and Republicans alike play the blame game on one another, pandering for emotionally-charged votes, while members from both parties take significant amounts of cash from the financial industry, which has one of the largest armies of lobbyists in Washington to ensure very little is done to regulate it.

The move by Moody’s is good, and reflects a long-overdue divorce between two industries that should not be in bed together. Whether the long-term effects of this downgrade will mean more accurate information and better oversight remains doubtful without aggressive political action to curtail the greed Wall Street has substituted for the public agenda.