While credit scoring is not the black hole some consumer groups make it out to be, scoring and the companies which compute the scores could stand some fine tuning, according to a California mortgage broker who has spent the last three years dissecting statistical modeling.

Credit scoring is not perfect, says Ginny Ferguson of Heritage Valley Mortgage in Pleasonton. But it s not a magic block box, either. In fact, it s not that different from logical underwriting without the personal baggage that humans tend to bring to the table.

Ferguson, who testified recently at a hearing on credit scoring held by the Federal Trade Commission in Washington, believes that in most cases, statistical modeling is a better system than any that has gone before it. Yet, she says federal regulators hear only the horror stories about scoring and nothing about the thousands of loans the system pops out without a problem.

A few individuals may be forced into more expensive loans or denied mortgages outright because of credit scoring, she admits. But dozens more people qualify who might not have otherwise made the grade before scoring came into vogue.

Still, there are some shortcomings that Ferguson, an 18-year mortgage industry veteran who co-chaired the National Association of Mortgage Brokers credit scoring task force, and many others would like to see addressed. Mortgage brokers now originate more than six out of ten home loans.

One is the fact that some tradelines don t report regularly to the three credit repositories. Another is that the three bureaus use either numerical or alphabetical codes to explain why a borrower s score wasn t as high as it might be. But one thing Ferguson wouldn't change is not giving loan applicants their scores.

Opponents of credit scoring question why applicants are not told their scores, suggesting that something sinister is afoot. But Ferguson says consumers aren t notified of their score simply because they can t do anything with it.

It s the loan originator s job, not the credit bureau s, to tell their clients their scores and explain exactly what the number means, she maintains. It s our duty to tell our borrowers where they stand and why, and to explain to them why they might not have access to the best products and what they can do to improve their profiles.

But because a credit score is a snapshot of a would-be borrower s credit standing at a isolated point in time, the mortgage professional believes that information in the file must be as current as possible. If it s not, she explains, the score might come in lower than it should. And if the number is too low, it could take anywhere from 90 days to a year to move back up to where it belongs.

Yet some tradelines don t report to their credit bureaus more than once every few months, she says, noting that NAMB has asked the credit bureaus to put pressure on their clients to file their reports on a more consistent, month-by-month basis.

And although the repositories each report four different reason codes, each listed in the order of importance, to show which areas of the consumer s credit didn t score well, Ferguson would prefer more a detailed explanation. We need reasons, not codes, she complains.

Until these and other improvements are made, the mortgage broker advised her colleagues to be ever vigil when analyzing their clients credit reports and scores, and to be extremely careful in counseling them on how to boost their chances of qualifying for a mortgage.

For one thing, she points out, don t suggest that borrowers close or consolidate accounts without first reviewing their entire credit picture. To do otherwise might be sentencing a consumer to a lower score that can t be fixed right away, she explains.

If a consumer needs to reduce the amount of credit extended to him, she adds, it s better to have several cards with low balances than one or two that are near their limits. Consequently, closing accounts with zero balances or transferring several balances to a single account could have a negative impact.

Loan agents also should be wary of misdated account closures. Often, Ferguson explains, when companies are notified that they have failed to close accounts as previously requested, they close the file on the date of the second request instead of the original one. And that could be taken as a sign of trouble.

The more recent the occurrence, she says, the greater effect it will have on a score. But the older and more isolated the occurrence, the less the risk.

Ferguson also reports that under Fannie Mae and Freddie Mac guidelines, if it can be proven that a borrower s credit file contains an error, the score can be ignored and the mortgage can be underwritten manually.

Published: August 30, 1999

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