Could your credit score come in artificially low in your next mortgage application because your lender is using an outdated credit score software model? And could that, in turn, potentially disqualify you for the lowest possible mortgage rates and fees?

Absolutely. Mortgage brokers and the company that dominates the credit score industry--Fair, Isaac and Co., Inc--agreed last week that outdated software may be hurting some consumers at the home loan application table. Some wholesale mortgage lenders--those who buy newly-originated loans from brokers--are still using credit score programs that date back to 1994, according to Ginny Ferguson, head of the credit scoring committee of the National Association of Mortgage Brokers.

Since then, Fair, Isaac (“FICO”) has updated its scoring programs several times in ways that directly affect consumers. For example, ealier FICO scoring models penalized applicants for having multiple “inquiries” on their credit files, even though the consumer was simply shopping the market for competitive rate quotes on the same loan transaction. Updated models ignore multiple inquiries in a short time period for a new home mortgage or refinancing.

Similarly, older FICO credit scoring models penalized some applicants whose records indicated that they had sought help from a consumer credit counseling agency. Older models also reduced consumers' credit scores when their records revealed that they had obtained credit from a “consumer finance” company. Such companies specialize in loaning money to borrowers with credit problems. The mere fact that applicants had obtained credit from a finance company automatically cut points off their credit scores, even if they had never been delinquent.

Fair, Isaac officials decline to estimate how much these factors can lower an individual's score, but they concede the industry has a problem: Many mortgage loan programs carry rates and fees tied to FICO score cut-off thresholds. If you have a 615 FICO score and you need a 620 to get a 7 1/4 percent interest rate, your five-point deficiency could cost you another 1/4 of a percentage point or more on a 30-year loan. Yet if your deficiency is caused through the use of an outdated credit score model--one that penalizes you for multiple inquiries, for example--then your score is artificially and unfairly low. It would be higher if your credit file were run through updated FICO software.

How could this be? Why are multiple versions of FICO credit score programs in use in the marketplace, each of which scores the same consumer by slightly different rules?

“It's a problem, we agree, but it's one that we have very little control over,” says Fair, Isaac spokesman Craig Watts. As Fair, Isaac rolls out successive FICO score models, lenders are free to choose whether to use the latest software or stick with the model they're already using. Though most recognize the value of updating their underwriting, says Watts, there is a cost to a lender anytime it overhauls its systems. Revamping a national underwriting system can cost hundreds of thousands of dollars--an expense some lenders decline to undertake.

As a result, according to Ferguson, “we are sometimes dealing with more than one (credit) score” on a home loan application. The broker may order a FICO score from its local credit report vendor, which may be using the the most recent FICO software. That score may come in at a 632 on a hypothetical applicant. But then the wholesale lender pulls the score for the same applicant using an older, outdated FICO model and comes in with a lower number--say a 618.

“It's very frustrating,” says Ferguson, who heads Hunt Valley Mortgage, Inc., in Pleasanton, Calif. Worse yet, if the wholesale lender insists on using the lower score and charging the borrower more, the applicant ends up needlessly overcharged.

The solution? Fair, Isaac is urging all lenders to update their systems with the latest credit scoring model--dubbed Next Generation--so as to produce greater uniformity and fairness in scoring. And at the broker level, the National Association of Mortgage Brokers is urging its members to challenge artificially lower scores when they see them, and demand to see the actual credit file a score is based upon.

“When you've got identical data (in the credit file) but differing scores on the same applicant,” says Ferguson, “then you know where the problem is”--an outdated credit score model.

Published: February 18, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.